Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
x
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
|
|
|
For the Quarterly Period Ended March 31, 2010
|
|
OR
|
|
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
|
For the transition period from
to
Commission File Number 1-14472
CORNELL
COMPANIES, INC.
(Exact Name of Registrant as Specified in Its
Charter)
Delaware
|
|
76-0433642
|
(State or Other Jurisdiction
of Incorporation or Organization)
|
|
(I.R.S. Employer
Identification No.)
|
|
|
|
1700 West Loop South, Suite 1500, Houston,
Texas
|
|
77027
|
(Address of Principal Executive Offices)
|
|
(Zip Code)
|
Registrants
Telephone Number, Including Area Code:
(713) 623-0790
Indicate
by a check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes
x
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files.) Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of large accelerated filer, accelerated filer, and smaller
reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
|
|
Accelerated filer
x
|
|
|
|
Non-accelerated filer
o
|
|
Smaller reporting
company
o
|
(Do not check if a
smaller reporting company)
|
|
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act).
Yes
o
No
x
At May 6, 2010, the registrant had 14,897,068 shares of common
stock outstanding.
Table of
Contents
Forward-Looking Information
The statements included in this quarterly
report regarding future financial performance and results of operations and
other statements that are not historical facts are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934.
Forward-looking statements in this quarterly report include, but are not
limited to, statements about the following subjects:
·
revenues,
·
revenue mix,
·
expenses, including personnel and medical costs,
·
results of operations,
·
operating margins,
·
supply and demand,
·
market outlook in our various markets,
·
our other expectations with regard to market outlook,
·
utilization,
·
parolee, detainee, inmate and youth offender trends,
·
pricing and per diem rates,
·
contract commencements,
·
new contract opportunities,
·
our proposed merger transaction with The GEO Group, Inc.
(including, but not limited to, expected timing of completion of the transaction,
ability to obtain required regulatory approvals, satisfaction of required
closing conditions),
·
operations at, future contracts for, and results from
our Baker Community Correctional Facility and Mesa Verde Community Correctional
Facility,
·
operations at, future contracts for, and results from
our Regional Correctional Center,
·
the timing (including ramp of facility population) and
other aspects of our planned customer transition at our D. Ray James Prison,
·
adequacy of insurance,
·
debt levels,
·
debt reduction,
·
common stock repurchases,
·
the effect of income tax positions and related assets
and liabilities,
·
our effective tax rate,
·
tax assessments,
·
results and effects of legal proceedings and
governmental audits and assessments,
·
liquidity, including future liquidity and our ability
to obtain financing,
·
financial markets,
·
cash flow from operations,
·
adequacy of cash flow for our obligations,
·
capital requirements,
·
capital expenditures,
·
effects of accounting changes and adoption of
accounting policies,
·
changes in laws and regulations,
·
adoption of accounting policies,
·
benefit payments, and
·
changes in laws and regulations.
Forward-looking
statements in this quarterly report are identifiable by use of the following
words and other similar expressions among others:
·
anticipates
·
believes
·
budgets
·
could
·
estimates
3
Table of Contents
·
expects
·
forecasts
·
intends
·
may
·
might
·
plans
·
predicts
·
projects
·
scheduled
·
should
Such statements are subject to numerous risks,
uncertainties and assumptions, including, but not limited to:
·
those described (in the Companys 2009 Annual Report
on Form 10-K) under Item 1A. Risk Factors, as filed with the SEC,
·
the adequacy of sources of liquidity,
·
the effect and results of litigation, audits and
contingencies, and
·
other factors discussed in this quarterly report and
in the Companys other filings with the SEC, which are available free of charge
on the SECs website at
www.sec.gov
.
Should one or more of
these risks or uncertainties materialize, or should underlying assumptions
prove incorrect, actual results may vary materially from those indicated.
All subsequent written
and oral forward-looking statements attributable to the Company or to persons
acting on our behalf are expressly qualified in their entirety by reference to
these risks and uncertainties. You should not place undue reliance on
forward-looking statements. Each forward-looking statement speaks only as of
the date of the particular statement, and we undertake no obligation to
publicly update or revise any forward-looking statements.
4
Table of
Contents
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements.
CORNELL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data)
|
|
March 31,
2010
|
|
December 31,
2009
|
|
ASSETS
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,061
|
|
$
|
27,724
|
|
Accounts receivable
trade (net of allowance for doubtful accounts of $4,459 and
$4,345, respectively)
|
|
55,803
|
|
59,496
|
|
Other receivables
|
|
2,635
|
|
1,587
|
|
Bond fund payment account
and other restricted assets
|
|
30,492
|
|
29,978
|
|
Deferred tax assets
|
|
9,754
|
|
9,843
|
|
Prepaid expenses and other
|
|
10,533
|
|
11,647
|
|
Total current assets
|
|
127,278
|
|
140,275
|
|
PROPERTY AND EQUIPMENT,
net
|
|
457,274
|
|
455,523
|
|
OTHER ASSETS:
|
|
|
|
|
|
Debt service reserve fund
and other restricted assets
|
|
29,884
|
|
27,017
|
|
Goodwill
|
|
13,308
|
|
13,308
|
|
Intangible assets, net
|
|
1,053
|
|
1,185
|
|
Deferred costs and other
|
|
14,968
|
|
13,257
|
|
Total assets
|
|
$
|
643,765
|
|
$
|
650,565
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
Accounts payable and
accrued liabilities
|
|
$
|
58,574
|
|
$
|
62,287
|
|
Current portion of
long-term debt
|
|
13,411
|
|
13,413
|
|
Total current
liabilities
|
|
71,985
|
|
75,700
|
|
LONG-TERM DEBT, net of
current portion
|
|
287,286
|
|
289,841
|
|
DEFERRED TAX LIABILITIES
|
|
24,984
|
|
24,455
|
|
OTHER LONG-TERM LIABILITIES
|
|
1,845
|
|
1,831
|
|
Total liabilities
|
|
386,100
|
|
391,827
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
EQUITY:
|
|
|
|
|
|
Preferred stock, $.001 par
value, 10,000,000 shares authorized, none issued
|
|
|
|
|
|
Common stock, $.001 par
value, 30,000,000 shares authorized, 16,184,212 and 16,434,940 shares issued
and 14,787,032 and 14,947,054 shares outstanding, respectively
|
|
16
|
|
16
|
|
Additional paid-in capital
|
|
165,708
|
|
168,852
|
|
Retained earnings
|
|
101,224
|
|
97,944
|
|
Accumulated other
comprehensive income
|
|
1,358
|
|
1,422
|
|
Treasury stock (1,397,180
and 1,487,886 shares of common stock, at cost, respectively)
|
|
(11,163
|
)
|
(11,888
|
)
|
Total Cornell Companies, Inc.
stockholders equity
|
|
257,143
|
|
256,346
|
|
Non-controlling interest
|
|
522
|
|
2,392
|
|
Total equity
|
|
257,665
|
|
258,738
|
|
Total liabilities and
equity
|
|
$
|
643,765
|
|
$
|
650,565
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
5
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE
INCOME
(Unaudited)
(in thousands, except per share data)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
REVENUES
|
|
$
|
100,006
|
|
$
|
99,710
|
|
OPERATING EXPENSES,
EXCLUDING DEPRECIATION AND AMORTIZATION
|
|
76,683
|
|
72,891
|
|
DEPRECIATION AND
AMORTIZATION
|
|
4,699
|
|
4,893
|
|
GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
5,759
|
|
6,138
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
|
|
12,865
|
|
15,788
|
|
|
|
|
|
|
|
INTEREST EXPENSE
|
|
6,314
|
|
6,199
|
|
INTEREST INCOME
|
|
(129
|
)
|
(246
|
)
|
|
|
|
|
|
|
INCOME FROM OPERATIONS
BEFORE PROVISION FOR INCOME TAXES
|
|
6,680
|
|
9,835
|
|
|
|
|
|
|
|
PROVISION FOR INCOME TAXES
|
|
2,831
|
|
4,101
|
|
|
|
|
|
|
|
NET INCOME
|
|
3,849
|
|
5,734
|
|
|
|
|
|
|
|
NON-CONTROLLING INTEREST
|
|
569
|
|
477
|
|
|
|
|
|
|
|
INCOME AVAILABLE TO
CORNELL COMPANIES, INC.
|
|
$
|
3,280
|
|
$
|
5,257
|
|
|
|
|
|
|
|
EARNINGS PER SHARE ATTRIBUTABLE TO CORNELL
COMPANIES, INC. STOCKHOLDERS:
|
|
|
|
|
|
BASIC
|
|
$
|
.22
|
|
$
|
.36
|
|
DILUTED
|
|
$
|
.22
|
|
$
|
.36
|
|
|
|
|
|
|
|
NUMBER OF SHARES USED IN PER SHARE COMPUTATION:
|
|
|
|
|
|
BASIC
|
|
14,756
|
|
14,572
|
|
DILUTED
|
|
14,882
|
|
14,629
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME:
|
|
|
|
|
|
Net income
|
|
$
|
3,849
|
|
$
|
5,734
|
|
Comprehensive income
attributable to non-controlling interest
|
|
(569
|
)
|
(477
|
)
|
Comprehensive income
attributable to Cornell Companies, Inc.
|
|
$
|
3,280
|
|
$
|
5,257
|
|
The accompanying
notes are an integral part of these consolidated financial statements.
6
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
AND
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010
(Unaudited)
(in thousands, except share data)
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT DECEMBER 31,
2009
|
|
16,434,940
|
|
$
|
16
|
|
$
|
168,852
|
|
$
|
97,944
|
|
1,487,886
|
|
$
|
(11,888
|
)
|
$
|
1,422
|
|
$
|
2,392
|
|
$
|
258,738
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
|
|
|
|
3,280
|
|
|
|
|
|
|
|
569
|
|
3,849
|
|
3,280
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,280
|
|
EXERCISE OF STOCK
OPTIONS
|
|
625
|
|
|
|
20
|
|
|
|
(2,132
|
)
|
17
|
|
|
|
|
|
37
|
|
|
|
DISTRIBUTION TO MCF
PARTNERS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,439
|
)
|
(2,439
|
)
|
|
|
REPURCHASE AND
RETIREMENT OF COMMON STOCK
|
|
(145,473
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
DEFERRED AND
OTHER STOCK COMPENSATION
|
|
(105,880
|
)
|
|
|
(438
|
)
|
|
|
(61,035
|
)
|
489
|
|
|
|
|
|
51
|
|
|
|
AMORTIZATION OF GAIN ON
TERMINATION OF DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64
|
)
|
|
|
(64
|
)
|
|
|
ISSUANCE OF
COMMON STOCK TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
169
|
|
|
|
(23,237
|
)
|
186
|
|
|
|
|
|
355
|
|
|
|
ISSUANCE OF
COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
|
|
|
|
105
|
|
|
|
(4,302
|
)
|
33
|
|
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT MARCH 31,
2010
|
|
16,184,212
|
|
$
|
16
|
|
$
|
165,708
|
|
$
|
101,224
|
|
1,397,180
|
|
$
|
(11,163
|
)
|
$
|
1,358
|
|
$
|
522
|
|
$
|
257,665
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
7
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN EQUITY
AND
COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2009
(Unaudited)
(in thousands, except share data)
|
|
Common Stock
|
|
Additional
|
|
|
|
|
|
|
|
Accumulated
Other
|
|
Non-
|
|
Total
|
|
|
|
|
|
|
|
Par
|
|
Paid-In
|
|
Retained
|
|
Treasury Stock
|
|
Comprehensive
|
|
Controlling
|
|
Stockholders
|
|
Comprehensive
|
|
|
|
Shares
|
|
Value
|
|
Capital
|
|
Earnings
|
|
Shares
|
|
Cost
|
|
Income
|
|
Interest
|
|
Equity
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT DECEMBER 31,
2008
|
|
16,238,685
|
|
$
|
16
|
|
$
|
164,746
|
|
$
|
73,318
|
|
1,506,163
|
|
$
|
(12,034
|
)
|
$
|
1,676
|
|
$
|
445
|
|
$
|
228,167
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
|
|
|
|
|
5,257
|
|
|
|
|
|
|
|
477
|
|
5,734
|
|
5,257
|
|
COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,257
|
|
EXERCISE OF STOCK
OPTIONS
|
|
750
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
INCOME TAX BENEFIT FROM
STOCK OPTION EXERCISES
|
|
|
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
(71
|
)
|
|
|
DEFERRED AND
OTHER STOCK COMPENSATION
|
|
(293
|
)
|
|
|
413
|
|
|
|
|
|
|
|
|
|
|
|
413
|
|
|
|
AMORTIZATION OF GAIN ON
TERMINATION OF DERIVATIVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(63
|
)
|
|
|
(63
|
)
|
|
|
ISSUANCE OF COMMON STOCK
TO EMPLOYEE STOCK PURCHASE PLAN
|
|
|
|
|
|
143
|
|
|
|
(18,277
|
)
|
146
|
|
|
|
|
|
289
|
|
|
|
ISSUANCE OF
COMMON STOCK UNDER 2000 DIRECTORS STOCK PLAN
|
|
3,459
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCES AT MARCH 31,
2009
|
|
16,242,601
|
|
$
|
16
|
|
$
|
165,356
|
|
$
|
78,575
|
|
1,487,886
|
|
$
|
(11,888
|
)
|
$
|
1,613
|
|
$
|
922
|
|
$
|
234,594
|
|
|
|
The accompanying notes are an integral part of these consolidated
financial statements.
8
Table of
Contents
CORNELL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net income
|
|
$
|
3,849
|
|
$
|
5,734
|
|
Adjustments to reconcile
net income to net cash used in operating activities
|
|
|
|
|
|
Depreciation
|
|
4,567
|
|
4,445
|
|
Amortization of
intangibles
|
|
132
|
|
448
|
|
Amortization of deferred
financing costs
|
|
310
|
|
319
|
|
Amortization of Senior
Notes discount
|
|
46
|
|
46
|
|
Amortization of gain on
termination of derivative
|
|
(64
|
)
|
(64
|
)
|
Stock-based compensation
|
|
729
|
|
594
|
|
Provision for bad debts
|
|
322
|
|
668
|
|
(Gain)loss on property and
equipment
|
|
(10
|
)
|
14
|
|
Change in assets and liabilities:
|
|
|
|
|
|
Accounts receivable
|
|
2,889
|
|
(4,611
|
)
|
Other restricted assets
|
|
(3,173
|
)
|
(375
|
)
|
Deferred income taxes
|
|
617
|
|
249
|
|
Other assets
|
|
(17
|
)
|
854
|
|
Accounts payable and
accrued liabilities
|
|
(11,000
|
)
|
(10,555
|
)
|
Other liabilities
|
|
(214
|
)
|
145
|
|
Net cash used in operating
activities
|
|
(1,017
|
)
|
(2,089
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
Capital expenditures
|
|
(3,227
|
)
|
(3,168
|
)
|
Payments to restricted
debt payment account, net
|
|
(208
|
)
|
(381
|
)
|
Net cash used in investing
activities
|
|
(3,435
|
)
|
(3,549
|
)
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
Proceeds from line of
credit
|
|
|
|
2,000
|
|
Payments of line of credit
|
|
(2,600
|
)
|
(1,000
|
)
|
Payments of capital lease
obligations
|
|
(3
|
)
|
(3
|
)
|
Purchase and retirement of
common stock
|
|
(3,000
|
)
|
|
|
Proceeds from exercise of
stock options and employee stock purchase plan
|
|
392
|
|
299
|
|
Net cash provided by (used
in) financing activities
|
|
(5,211
|
)
|
1,296
|
|
|
|
|
|
|
|
NET DECREASE IN CASH AND
CASH EQUIVALENTS
|
|
(9,663
|
)
|
(4,342
|
)
|
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD
|
|
27,724
|
|
14,613
|
|
CASH AND CASH EQUIVALENTS
AT END OF PERIOD
|
|
$
|
18,061
|
|
$
|
10,271
|
|
|
|
|
|
|
|
OTHER NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
Common stock issued for
board of directors fees
|
|
$
|
140
|
|
$
|
115
|
|
Purchases and additions to
property and equipment included in accounts payable and
accrued liabilities
|
|
3,081
|
|
1,557
|
|
Tax expense of stock
option exercises
|
|
|
|
(71
|
)
|
The accompanying
notes are an integral part of these consolidated financial statements.
9
Table of
Contents
CORNELL COMPANIES, INC.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(unaudited)
1.
Basis of
Presentation
The
accompanying unaudited consolidated financial statements have been prepared by
Cornell Companies, Inc. (collectively with its subsidiaries and
consolidated special purpose entities, unless the context requires otherwise,
the Company, we, us or our) pursuant to the rules and regulations
of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles in the United States (GAAP) have been condensed or omitted
pursuant to such rules and regulations.
The year-end consolidated balance sheet was derived from audited
financial statements but does not include all disclosures required by GAAP. In
the opinion of management, adjustments and disclosures necessary for a fair presentation
of these financial statements have been included. Estimates were used in the preparation of
these financial statements. Actual
results could differ from those estimates.
These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2009 Annual
Report on Form 10-K as filed with the Securities and Exchange Commission.
2.
Accounting
Policies
See
a description of our accounting policies in the Notes to Consolidated Financial
Statements included in our 2009 Annual Report on Form 10-K.
3.
Stock-Based Compensation
We have an employee stock purchase plan
(ESPP)
under which
employees can make contributions to purchase our common stock. Participation in
the plan is elected annually by employees. The plan year typically begins each January 1st
(the Beginning Date) and ends on December 31st (the Ending Date).
Purchases of common stock are made at the end of the year using the lower of
the fair market value on either the Beginning Date or Ending Date, less a 15%
discount.
Under
current authoritative guidance our employee-stock purchase plan is considered
to be a compensatory ESPP, and therefore, we recognize compensation expense
over the requisite service period for grants made under the ESPP. Compensation
expense of approximately $0.03 million was recognized in both the three months
ended March 31, 2010 and 2009, respectively.
Our stock incentive plans
provide for the granting of stock options (both incentive stock options and
nonqualified stock options), stock appreciation rights, restricted stock shares
and other stock-based awards to officers, directors and employees of the
Company. Grants of stock options made to date under these plans vest over
periods up to seven years after the date of grant and expire no more than 10
years after grant. Upon the occurrence of specified change of control events,
those awards outstanding which have not previously vested will automatically
vest.
At March 31, 2009,
153,300 shares of restricted stock were outstanding subject to
performance-based vesting criteria (32,500 of these restricted shares were
considered market-based restricted stock under authoritative guidance). There
were also 6,260 stock options outstanding subject to performance-based vesting
criteria. We recognized $0.04 million of expense associated with these shares
of restricted stock and stock options during the three months ended March 31,
2009.
At March 31, 2010,
273,769 shares of restricted stock were outstanding subject to performance-based
vesting criteria (32,500 of these restricted shares were considered
market-based restricted stock under authoritative guidance). There were also
stock options for 840 shares outstanding subject to performance-based vesting
criteria. We recognized $0.2 million of expense associated with these shares of
restricted stock and stock options during the three months ended March 31,
2010.
The amounts above relate to the impact of recognizing
compensation expense related to stock options and restricted stock.
Compensation expense related to stock options (840 shares) and restricted stock
(241,269 shares) that vest based upon performance conditions is not recorded
for such performance-based awards until it has been deemed probable that the
related performance targets allowing the vesting of these options and
restricted stock will be met. We are required to periodically re-assess the
probability that these options will vest and begin to record expense at that
point in time. During the three months ended March 31, 2010 it was deemed
probable that certain performance targets pertaining to certain restricted
stock and stock options would be achieved by their vesting date. Accordingly,
compensation expense of approximately $0.1 million was recognized in the three
months ended March 31, 2010 related to these performance-based awards.
10
Table
of Contents
We recognize expense for our stock-based compensation
over the vesting period, or in the case of performance-based awards, during the
service period for which the performance target becomes probable of being met,
which represents the period in which an employee is required to provide service
in exchange for the award. We recognize compensation expense for stock-based
awards immediately if the award has immediate vesting.
Assumptions
The
fair values for the significant stock-based awards granted during the three
months ended March 31, 2010 and 2009 were estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions:
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Risk-free rate of return
|
|
3.04
|
%
|
1.90
|
%
|
Expected life of award
|
|
6.0 years
|
|
6.0 years
|
|
Expected dividend yield of stock
|
|
0
|
%
|
0
|
%
|
Expected volatility of stock
|
|
41.89
|
%
|
50.49
|
%
|
Weighted-average fair value
|
|
$
|
10.34
|
|
$
|
8.89
|
|
|
|
|
|
|
|
|
|
The
expected volatility of stock assumption was derived by referring to changes in
the Companys historical common stock prices over a timeframe similar to that
of the expected life of the award. We do not believe that future stock
volatility will significantly differ from historical stock volatility.
Estimated forfeiture rates are derived from historical forfeiture patterns. We
believe the historical experience method is the best estimate of forfeitures
currently available.
Generally
we utilized the simplified method for plain vanilla options to estimate the
expected term of options granted during the periods noted (where
appropriate). For those grants during
these periods wherein we had sufficient historical or impartial data to better
estimate the expected term, we have done so.
Stock-based
option activity during the three months ended March 31, 2010 was as
follows (aggregate intrinsic value in millions):
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2009
|
|
496,247
|
|
$
|
15.36
|
|
5.9
|
|
$
|
7.6
|
|
Granted
|
|
40,000
|
|
23.08
|
|
|
|
|
|
Exercised
|
|
(8,425
|
)
|
13.61
|
|
|
|
|
|
Canceled
|
|
(2,962
|
)
|
11.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2010
|
|
524,860
|
|
$
|
16.00
|
|
6.0
|
|
$
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at March 31, 2010
|
|
523,135
|
|
$
|
15.70
|
|
6.0
|
|
$
|
8.4
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2010
|
|
479,770
|
|
$
|
15.45
|
|
5.7
|
|
$
|
7.4
|
|
The
total intrinsic value of stock options exercised during the three months ended March 31,
2010 and 2009 was approximately $0.1 million in each period. Net cash proceeds
from the exercise of stock options were approximately $0.04 million and $0.01
million for each of the three months ended March 31, 2010 and 2009,
respectively.
We
recognized $0.1 million of expense associated with time-based stock options
during the three months ended March 31, 2010. As of March 31, 2010,
approximately $0.3 million of estimated expense with respect to time-based
nonvested stock-based awards had yet to be recognized and will be amortized
into expense over the employees remaining requisite service period of
approximately four months.
11
Table of
Contents
The
following table summarizes information with respect to stock options
outstanding and exercisable at March 31, 2010.
Range of Exercise Prices
|
|
Number
Outstanding
|
|
Weighted
Average
Remaining
Life (Years)
|
|
Weighted
Average
Exercise
Price
|
|
Number
Exercisable
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.75 to $10.00
|
|
18,015
|
|
1.6
|
|
$
|
5.76
|
|
18,015
|
|
$
|
5.76
|
|
$10.01 to $13.50
|
|
146,945
|
|
4.5
|
|
12.85
|
|
144,945
|
|
12.85
|
|
$13.51 to
$14.50
|
|
168,200
|
|
5.5
|
|
13.99
|
|
164,500
|
|
13.98
|
|
$14.51 to
$25.00
|
|
191,700
|
|
8.0
|
|
21.13
|
|
152,310
|
|
20.65
|
|
|
|
524,860
|
|
6.0
|
|
$
|
16.00
|
|
479,770
|
|
$
|
15.45
|
|
Stock-based
award activity for nonvested awards during the three months ended March 31,
2010 is as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2009
|
|
20,510
|
|
$
|
20.32
|
|
Granted
|
|
40,000
|
|
23.08
|
|
Vested
|
|
(15,420
|
)
|
22.95
|
|
Canceled
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010
|
|
45,090
|
|
$
|
21.87
|
|
Restricted Stock
We have previously issued
restricted stock under certain employment agreements and stock incentive plans
which vests either over a specific period of time, generally three to five
years, or which will vest subject to certain market or performance
conditions. Those shares of restricted
common stock issued are subject to restrictions on transfer and certain
conditions to vesting. We issued no restricted stock under our 2006 Incentive
Plan during the three months ended March 31, 2010.
Restricted stock activity
for the three months ended March 31, 2010 was as follows:
|
|
Number
of
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
|
Nonvested at December 31, 2009
|
|
520,574
|
|
$
|
20.61
|
|
Granted
|
|
|
|
|
|
Vested
|
|
(87,833
|
)
|
22.12
|
|
Canceled
|
|
(6,875
|
)
|
23.15
|
|
|
|
|
|
|
|
Nonvested at March 31, 2010
|
|
425,866
|
|
$
|
20.26
|
|
We recognized $0.4
million of expense associated with nonvested time-based restricted stock awards
during the three months ended March 31, 2010. As of March 31, 2010, approximately $1.2
million of estimated expense with respect to nonvested time-based restricted
stock awards had yet to be recognized and will be amortized over a weighted
average period of 2.0 years.
Approximately $4.2 million of estimated
expense with respect to nonvested performance-based restricted stock option
awards had yet to be recognized as of March 31, 2010.
12
Table of
Contents
4.
Merger
Agreement
On
April 18, 2010, the Company entered into an Agreement and Plan of Merger (Agreement)
with The GEO Group, Inc. (NYSE:GEO) (GEO), a private provider of
correctional, detention, and residential treatment services to federal, state
and local government agencies around the globe. Pursuant to the Agreement, GEO
will acquire Cornell for stock and/or cash at an estimated enterprise value of
$685 million based on the closing prices of both companies stock on April 16,
2010, including the assumption of approximately $300 million in Cornell debt,
excluding cash.
Under
the terms of the definitive agreement, stockholders of Cornell will have the
option to elect to receive either (x) 1.3 shares of GEO common stock for
each share of Cornell common stock or (y) an amount of cash consideration
equal to the greater of (i) the fair market value of one share of GEO
common stock plus $6.00 or (ii) the fair market value of 1.3 shares of GEO
common stock. In order to preserve the tax-deferred treatment of the
transaction, no more than 20% of the outstanding shares of Cornell Common Stock
may be exchanged for the cash consideration. If elections are made such that
the aggregate cash consideration to be received by Cornell stockholders would
exceed $100 million in the aggregate, such excess amount may be paid at the
election of GEO in shares of GEO common stock or in cash.
The
merger is expected to close in the third quarter of 2010, subject to the
approval of the issuance of GEO common stock by GEOs shareholders, approval of
the transaction by Cornells stockholders and federal regulatory agencies,
including but not limited to the expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as well as the
fulfillment of other customary conditions.
Litigation
Relating to the Merger
On April 27, 2010, a
putative stockholder class action was filed in the District Court for Harris
County, Texas by Todd Shelby against Cornell, members of the Cornell board of
directors, individually, and GEO.
The complaint alleges, among
other things, that the Cornell directors breached their duties by entering into
the Agreement without first taking steps to obtain adequate, fair and maximum
consideration for Cornells stockholders by shopping the company or initiating
an auction process, by structuring the transaction to take advantage of Cornells
low current stock valuation, and by structuring the transaction to benefit GEO
while making an alternative transaction either prohibitively expensive or
otherwise impossible, and that Cornell and GEO have aided and abetted such
breaches by Cornells directors.
Among other things, the complaint seeks to enjoin
Cornell, its directors and GEO from completing the merger and seeks a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
5.
Fair Value Measurements
On
January 1, 2008, we adopted a newly issued accounting standard for fair
value measurements of financial assets and liabilities which did not have a
material financial impact on our consolidated results of operations or
financial condition. On January 1,
2009, we adopted the provisions of this new accounting pronouncement for
applying fair value to non-financial assets, liabilities and transactions on a
non-recurring basis. Adoption of the
provisions for the fair value measurements on a non-recurring basis did not
have a material effect on our financial position, results of operations or cash
flows.
As
defined in this accounting standard, fair value is the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date (exit price). Additionally, this pronouncement requires
disclosure that establishes a framework for measuring fair value and expands
disclosures about fair value measurements.
Additionally, it requires that fair value measurements be classified and
disclosed in one of the following categories:
Level
1
|
|
Unadjusted
quoted prices in active markets that are accessible at the measurement date
for identical, unrestricted assets or liabilities;
|
|
|
|
Level
2
|
|
Quoted
prices in markets that are not active, or inputs that are observable, either
directly or indirectly, for substantially the full term of the asset or
liability; and
|
|
|
|
Level
3
|
|
Prices
or valuation techniques that require inputs that are both significant to the
fair value measurement and unobservable (i.e., supported by little or no
market activity).
|
13
Table of
Contents
As
required, financial assets and liabilities are classified based on the lowest
level of input that is significant for the fair value measurement. The following table summarizes the valuation
of our financial assets and liabilities by pricing levels as of March 31,
2010:
|
|
Fair Value as of
March 31, 2010 (in thousands)
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
Corporate Bonds
|
|
$
|
|
|
$
|
12,317
|
|
$
|
|
|
$
|
12,317
|
|
Money Market Funds
|
|
|
|
43,922
|
|
|
|
43,922
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
corporate bonds and money market funds are carried in debt service fund and
other restricted assets and the debt service reserve fund in the accompanying
balance sheet. The fair value measurements for corporate bonds and money-market
funds are based upon the quoted price for similar assets in markets that are
not active, multiplied by the number of shares owned, exclusive of any
transaction costs and without any adjustments to reflect discounts that may be
applied to selling a large block of securities at one time. We do not believe that the changes in fair
value of these assets will materially differ from the amounts that could be
realized upon settlement or that the changes in fair value will have a material
effect on our results of operations, liquidity and capital resources.
This
accounting standard requires a reconciliation of the beginning and ending
balances for fair value measurements using Level 3 inputs. We had no such
assets or liabilities which were measured at fair value on a recurring basis
using significant unobservable inputs (level 3) during the three months ended March 31,
2010. We evaluated our long-lived assets
for impairment using internally developed, unobservable inputs (Level 3 inputs
in the fair value hierarchy of fair value accounting) based on the projected
cash flows of our idle facilities
. Such inputs that may significantly influence
estimated future cash flows include the periods and levels of occupancy for the
facility, expected per diem or reimbursement rates, assumptions regarding the
levels of staffing, services and future operating and capital expenditures
necessary to generate forecasted revenues, related costs for these activities
and future rate of increases or decreases associated with these factors.
Information typically utilized will also include relevant terms of existing
contracts (for similar services and customers), market knowledge of customer
demand (both present and anticipated) and related pricing, market competitors,
and our historical experience (as to areas including customer requirements,
contract terms, operating requirements/costs, occupancy trends, etc.).
6.
Recent Accounting Standards
In
January 2010, the FASB issued an amendment to the disclosure requirement
related to Fair Value Measurements. The
amendment requires new disclosures related to transfers in and out of Levels 1
and 2 and activity in Level 3 fair value measurements. A reporting entity is required to disclose
separately the amounts of significant transfers in and out of Level 1 and Level
2 fair value measurements and describe the reasons for the transfers. Additionally, in the reconciliation for fair
value measurements in Level 3, a reporting entity must present separately
information about purchases, sales, issuances and settlements (on a gross basis
rather than a net number). The new
disclosures are effective for interim and annual reporting periods beginning
after December 15, 2009, except for the disclosures about purchases,
sales, issuances and settlements in the roll forward of activity in Level 3
fair value measurements. Those
disclosures are effective for fiscal years beginning after December 15,
2010 and for interim periods within those fiscal years. Our adoption of this amendment did not have a
material affect on our financial position, results of operations or cash flows.
In June 2009, the
FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. This
amendment applies to the financial reporting of a transfer of financial assets;
the effects of a transfer on an entitys financial position, financial
performance and cash flows; and a transferors continuing involvement, if any,
in transferred financial assets. It
eliminates (1) the exceptions for qualifying special-purpose entities from
the consolidation guidance and (2) the exception that permitted sale
accounting for certain mortgage securitizations when a transferor has not
surrendered control over the transferred financial assets. The provisions of this amendment must be
applied as of the beginning of each reporting entitys first annual reporting
period that begins after November 15, 2009, for interim periods within
that first annual reporting period and for interim and annual reporting periods
thereafter. Earlier application was
prohibited. The requirements in the
amendment must be applied to transfers occurring on or after the effective
date. Our adoption of this amendment as of January 1, 2010 did not have a
material affect on our consolidated financial position, results of operations
or cash flows.
In June 2009, the FASB
also issued an amendment to the accounting and disclosure requirements for the
consolidation of variable interest entities (VIEs). This amendment requires
an enterprise to perform a qualitative analysis when determining whether or not
it must consolidate a VIE. The amendment
also requires an enterprise to continuously reassess whether it must
consolidate a VIE. Additionally, the
amendment requires enhanced disclosures about an enterprises involvement with
VIEs and any significant change in risk exposure due to that involvement, as
well as how its involvement with VIEs impacts the enterprises financial
statements. Finally, an enterprise will
be required to disclose significant judgments and assumptions used to determine
whether or not to
14
Table
of Contents
consolidate a VIE. This
amendment is effective for financial statements issued for fiscal years
beginning after November 15, 2009.
Earlier application was prohibited.
Our adoption of this amendment as of January 1,
2010 did not have a material affect on our consolidated financial position,
results of operations or cash flows; however, we have included the applicable
disclosure requirements at Note 14 to the consolidated financial statements.
7.
Intangible Assets
Intangible
assets at March 31, 2010 and December 31, 2009 consisted of the
following (in thousands):
|
|
March 31,
2010
|
|
December 31,
2009
|
|
|
|
|
|
|
|
Acquired contract value
|
|
$
|
6,240
|
|
$
|
6,240
|
|
Accumulated amortization acquired contract value
|
|
(5,187
|
)
|
(5,055
|
)
|
Identified intangibles, net
|
|
1,053
|
|
1,185
|
|
Goodwill
|
|
13,308
|
|
13,308
|
|
Total intangibles, net
|
|
$
|
14,361
|
|
$
|
14,493
|
|
There were no changes in the carrying
amount of our goodwill in the three months ended March 31, 2010.
Amortization expense for our acquired contract value was approximately
$0.1 million and $0.3 million for the three months ended March 31, 2010
and 2009, respectively.
Our non-compete agreements were fully amortized as of December 31,
2009. Amortization expense for our non-compete agreements was approximately
$0.2 million in the three months ended March 31, 2009.
8.
Credit Facilities
Our
long-term debt consisted of the following (in thousands):
|
|
March 31,
|
|
December 31,
|
|
|
|
2010
|
|
2009
|
|
Debt of Cornell
Companies, Inc.:
|
|
|
|
|
|
Senior Notes, unsecured, due July 2012 with
an interest rate of 10.75%, net of discount
|
|
$
|
111,586
|
|
$
|
111,540
|
|
Revolving Line of Credit due December 2011
with an interest rate of LIBOR plus 1.50% to 2.25% or prime plus 0.00%
to 0.75% (the Amended Credit Facility)
|
|
67,400
|
|
70,000
|
|
Capital lease obligations
|
|
11
|
|
14
|
|
Subtotal
|
|
178,997
|
|
181,554
|
|
|
|
|
|
|
|
Debt of Special Purpose Entity:
|
|
|
|
|
|
8.47% Bonds due 2016
|
|
121,700
|
|
121,700
|
|
|
|
|
|
|
|
Total consolidated debt
|
|
300,697
|
|
303,254
|
|
|
|
|
|
|
|
Less: current maturities
|
|
(13,411
|
)
|
(13,413
|
)
|
|
|
|
|
|
|
Consolidated long-term debt
|
|
$
|
287,286
|
|
$
|
289,841
|
|
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest at either the LIBOR rate plus a margin ranging from
1.50% to 2.25% or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are subject to adjustments based on our
total leverage ratio.
The available commitment under our Amended Credit
Facility was approximately $20.5 million at March 31, 2010. We had outstanding borrowings under our
Amended Credit Facility of $67.4 million and we had outstanding letters of
credit of approximately $12.1 million at March 31, 2010. Subject to certain requirements, we have the
right to increase the commitments under our Amended Credit Facility up to
$150.0 million, although the indenture for our Senior Notes limits our ability,
subject to certain conditions, to expand the Amended Credit Facility beyond
$100.0 million. We can provide no assurance that all of the banks that have
made commitments to us under our Amended Credit Facility would be willing to
15
Table
of Contents
participate in an expansion to the Amended Credit Facility should we desire
to do so. The Amended Credit Facility
is
collateralized by substantially all of our assets, including the assets and
stock of all of our subsidiaries. The Amended Credit Facility is not
collateralized by the assets of Municipal Corrections Finance, L.P. (MCF).
Our Amended Credit Facility
contains certain financial and other restrictive covenants that limit our
ability to engage in certain activities. Our ability to borrow under the
Amended Credit Facility is subject to compliance with certain financial
covenants, including bank leverage, total leverage and fixed charge coverage
rates. At March 31, 2010, we were in compliance with all such covenants.
Our Amended Credit Facility includes
other restrictions that, among other things, limit our ability to: incur
indebtedness; grant liens; engage in mergers, consolidations and liquidations;
make investments, restricted payments and asset dispositions; enter into
transactions with affiliates; and engage in sale/leaseback transactions.
MCF is obligated for the
outstanding balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents.
The
bonds are limited, nonrecourse obligations of MCF and secured by the property
and equipment, bond reserves, assignment of subleases and substantially all
assets related to the facilities included in the 2001 Sale and Leaseback
Transaction (in which we sold eleven facilities to MCF). The bonds are not guaranteed by Cornell.
In
June 2004, we issued $112.0 million in principal of 10.75% Senior Notes
the (Senior Notes) due July 1, 2012.
The Senior Notes are unsecured senior indebtedness and are guaranteed by
all of our existing and future subsidiaries (collectively, the Guarantors). The Senior Notes are not guaranteed by MCF
(the Non-Guarantor). Interest on the
Senior Notes is payable semi-annually on January 1 and July 1 of each
year, commencing January 1, 2005.
On or after July 1, 2008, we have the right to redeem all or a
portion of the Senior Notes at the redemption prices (expressed as a percentage
of the principal amount) listed below, plus accrued and unpaid interest, if
any, on the Senior Notes redeemed, to the applicable date of redemption, if
redeemed during the 12-month period commencing on July 1 of each of the
remaining years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2009
|
|
102.688
|
%
|
2010 and
thereafter
|
|
100.000
|
%
|
As the Senior Notes are redeemable at our option
(subject to the requirements noted) we anticipate we will monitor the capital
markets and continue to assess our capital needs and our capital structure,
including a potential refinancing of the Senior Notes.
Upon the occurrence of
specified change of control events, unless we have exercised our option to
redeem all the Senior Notes as described above, each holder will have the right
to require us to repurchase all or a portion of such holders Senior Notes at a
purchase price in cash equal to 101% of the aggregate principal amount of the
notes repurchased plus accrued and unpaid interest, if any, on the Senior Notes
repurchased, to the applicable date of purchase. The Senior Notes were issued under an
indenture which limits our ability and the ability of our Guarantors to, among
other things, incur additional indebtedness, pay dividends or make other
distributions, make other restricted payments and investments, create liens,
incur restrictions on the ability of the
Guarantors to pay dividends or other payments to us,
enter into
transactions with affiliates, and engage in mergers, consolidations and certain
sales of assets.
9.
Income Taxes
At March 31, 2010,
the total amount of our unrecognized tax benefits was approximately $2.8 million.
We are subject to income
tax in the United States and many of the individual states we operate in. We currently have significant operations in
Texas, California, Colorado, Oklahoma, Georgia, Illinois and Pennsylvania. State income tax returns are generally
subject to examination for a period of three to five years after filing. The state impact of any changes made to the
federal return remains subject to examination by various states for a period up
to one year after formal notification to the state. We are open to United States Federal Income
Tax examinations for the tax years ended December 31, 2005 through December 31, 2008.
We do not anticipate a
significant change in the balance of our unrecognized tax benefits within the
next 12 months.
16
Table of Contents
10.
Earnings
Per Share
Basic earnings
per share (EPS) are computed by dividing net income by the weighted average
number of shares of common stock outstanding during the period. Diluted EPS
is computed by dividing net income by the weighted
average number of shares of common stock outstanding giving effect to all
potentially dilutive common shares outstanding during the period. Potentially
dilutive common shares include the dilutive effect of outstanding common stock
options and restricted common stock granted under our various option and other
incentive plans.
For the three
months ended March 31, 2010 and 2009, there were 104,200 shares ($23.18
average price) and 141,700 shares ($20.98 average price), respectively, of
stock options that were not included in the computation of diluted EPS because
to do so would have been anti-dilutive.
As of January 1, 2009, instruments with
nonforfeitable
dividend rights
granted
in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in
computing EPS under the two-class method.
For our fiscal
year beginning January 1, 2009, since our restricted common stock grants
(including both vested and those unvested due to either time or performance
requirements) convey nonforfeitable rights to dividends while outstanding, they
are included in both basic and fully diluted ESP calculations.
All prior-period EPS data has been
adjusted retrospectively to conform to the calculation of EPS.
The following
table summarizes the calculation of net earnings and weighted average common
shares and common equivalent shares outstanding for purposes of the computation
of earnings per share (in thousands, except per share data):
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Income
available to stockholders
|
|
$
|
3,280
|
|
$
|
5,257
|
|
|
|
|
|
|
|
Weighted
average common share outstanding
|
|
14,756
|
|
14,572
|
|
Weighted
average common share equivalents outstanding
|
|
126
|
|
57
|
|
Weighted
average common shares and common share equivalents outstanding
|
|
14,882
|
|
14,629
|
|
|
|
|
|
|
|
Basic income
per share
|
|
$
|
.22
|
|
$
|
.36
|
|
|
|
|
|
|
|
Diluted
income per share
|
|
$
|
.22
|
|
$
|
.36
|
|
11.
Commitments
and Contingencies
Financial
Guarantees
During the normal course of business, we enter into
contracts that contain a variety of representations and warranties and provide
general indemnifications. Our maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against us that
have not yet occurred. However, based on experience, we believe the risk of
loss to be remote.
Legal Proceedings
We are party to various legal proceedings, including
those noted below. While management presently believes that the ultimate
outcome of these proceedings will not have a material adverse effect on our
financial position, overall trends in results of operations or cash flows,
litigation is subject to inherent uncertainties, and unfavorable rulings could
occur. An unfavorable ruling could include monetary damages or equitable
relief, and could have a material adverse impact on the net income of the
period in which the ruling occurs or in future periods.
Valencia County Detention Center
In
April 2007, a lawsuit was filed against the Company in the Federal
District Court in Albuquerque, New Mexico, by Joe Torres and Eufrasio Armijo,
who each alleged that he was strip searched at the Valencia County Detention
Center (VCDC) in New Mexico in violation of his federal rights under the
Fourth, Fourteenth and Eighth amendments to the U.S. Constitution. The
claimants also alleged violation of their rights under state law and sought to
bring the case as a class action on behalf of themselves and all detainees at
VCDC during the applicable statutes of limitation. The plaintiffs sought
damages and declaratory and injunctive relief. Valencia County is also a
named defendant in the case and operated the VCDC for a significantly greater portion
of the period covered by the lawsuit.
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Table of
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In
December 2008, the parties agreed to a proposed stipulation of settlement
and, in July 2009, the Court granted final approval of the
settlement. The settlement amount under
the terms of the agreement is $3.3 million.
Cornells
portion of the stipulated settlement, based on the number of inmates housed at
VCDC during the time Cornell operated the facility in comparison to the number
of inmates housed at the facility during the time Valencia County operated the
facility, is $1.2 million and was funded principally through our general
liability and professional liability coverage. The claims administration
process is under way and we expect it to be completed in the first half of
2010.
In
the year ended December 31, 2007, we previously provided insurance
reserves for this matter (as part of our regular review of reported and unreported
claims) totaling approximately $0.5 million.
During the fourth quarter of 2008, we recorded an additional settlement
charge of approximately $0.7 million and the related reimbursement from our
general liability and professional liability insurance. The charge and reimbursement were recognized
in general and administrative expenses for the year ended December 31,
2008. The reimbursement was funded by
the insurance carrier in the first quarter of 2009 into
a settlement account, where it will remain
until payments are made to the settlement class members.
Litigation
Relating to the Merger
On April 27, 2010, a
putative stockholder class action was filed in the District Court for Harris
County, Texas by Todd Shelby against Cornell, members of the Cornell board of
directors, individually, and GEO.
The complaint alleges, among
other things, that the Cornell directors breached their duties by entering into
the Agreement without first taking steps to obtain adequate, fair and maximum
consideration for Cornells stockholders by shopping the company or initiating
an auction process, by structuring the transaction to take advantage of Cornells
low current stock valuation, and by structuring the transaction to benefit GEO
while making an alternative transaction either prohibitively expensive or
otherwise impossible, and that Cornell and GEO have aided and abetted such
breaches by Cornells directors.
Among other things, the complaint seeks to enjoin
Cornell, its directors and GEO from completing the merger and seeks a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
Other
We
hold insurance policies to cover potential director and officer liability, some
of which may limit our cash outflows in the event of a decision adverse to us
in the matter discussed above. However, if an adverse decision in the matter
exceeds the insurance coverage or if the insurance coverage is deemed not to
apply to the matter, it could have a material adverse effect on us, our
financial condition, results of operations and future cash flows.
We
currently and from time to time are subject to claims and suits arising in the
ordinary course of business, including claims for damages for personal injuries
or for wrongful restriction of or interference with offender privileges and
employment matters. If an adverse decision in these matters exceeds our
insurance coverage, or if our coverage is deemed not to apply to these matters,
or if the underlying insurance carrier was unable to fulfill its obligation
under the insurance coverage provided, it could have a material adverse effect
on our financial condition, results of operations or cash flows.
While
the outcome of such other matters cannot be predicted with certainty, based on
the information known to date, we believe that the ultimate resolution of these
matters will not have a material adverse effect on our financial condition, but
could be material to operating results or cash flows for a particular reporting
period.
12. Financial
Instruments
The
carrying amounts of our financial instruments, including cash and cash
equivalents, investment securities, accounts receivable and accounts payable
and accrued expenses, approximate fair value due to the short term maturities
of these financial instruments. At December 31,
2009, the carrying amount of consolidated debt was $303.3 million, and the
estimated fair value was $309.1 million.
At March 31, 2010, the carrying amount was $300.7 million, and the
estimated fair value was $304.2 million.
The estimated fair value of long-term debt is based primarily on quoted
market prices or discounted cash flow analysis for the same or similar assets.
18
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13.
Derivative Financial Instruments And
Guarantees
Debt Service Reserve Fund and Debt Service
Fund
In August 2001, MCF
completed a bond offering to finance the 2001 Sale and Leaseback Transaction in
which we sold eleven facilities to MCF. In connection with this bond offering,
two reserve fund accounts were established by MCF pursuant to the terms of the
indenture: (1) MCFs Debt Service Reserve Fund, aggregating $23.4 million
at March 31, 2010, was established to: (a) make payments on MCFs
outstanding bonds in the event we (as lessee) should fail to make the scheduled
rental payments to MCF or (b) to the extent payments were not made under
(a), then to make final debt service payments on the then outstanding bonds and
(2) MCFs Bond Fund Payment Account, (as reported in Bond Fund Payment
Account and other restricted assets in our Consolidated Balance Sheet)
aggregating $12.3 million at March 31, 2010, was established to accumulate
the monthly lease payments that MCF receives from us until such funds are used
to pay MCFs semi-annual bond interest and annual bond principal payments, with
any excess to pay certain other expenses and to make certain transfers. These
reserve funds are invested in short-term money markets and commercial paper.
Both reserve fund accounts were subject to agreements with the MCF Equity
Investors (Lehman Brothers, Inc. (Lehman)) whereby guaranteed rates of
return of 3.0% and 5.08%, respectively, were provided for in the balance of the
Debt Service Reserve Fund and the Bond Fund Payment Account. The guaranteed
rates of return were characterized as cash flow hedge derivative instruments.
At inception, the derivative instruments had an aggregate fair value of $4.0
million, which was recorded as a decrease to the equity investment in MCF made
by the MCF Equity Investors (MCF non-controlling interest) and is included in
other long-term liabilities in our Consolidated Balance Sheets. Changes in the
fair value of the derivative instruments were recorded as an adjustment to
other long-term liabilities and reported as other comprehensive income in our
Consolidated Statements of Income and Comprehensive Income.
Due to the
bankruptcy of Lehman in 2008, the derivative instruments no longer qualified as
a hedge and was de-designated. Amounts included in accumulated other
comprehensive income are reclassified into earnings during the same periods in
which interest is earned on debt service funds
(approximately $0.01 million was amortized and
recognized in earnings in the three months ended March 31, 2010)
. Changes in
the fair value of these derivatives after de-designation were recorded to
earnings. The derivatives were terminated in the first quarter of 2009 with a
fair value of zero.
In
accordance with the terms of its partnership agreement, MCF has accrued a
distribution of $2.4 million to its partners as of March 31, 2010. The
distribution was made in April 2010.
14.
Variable Interest Entity
In
connection with the 2001 Sale and Leaseback Transaction with Municipal
Corrections Finance, L.P. (MCF), the Company determined that MCF was a
variable interest entity. The Company
concluded that it is the primary beneficiary of MCFs activities because
substantially all of the operating assets of MCF are utilized by the Company
and the lease payments made by the Company are the main source of cash
available to fund the debt obligations of MCF.
As a result, our consolidated balance sheet includes the assets and
liabilities of MCF. The results of
operations of MCF are reflected in non-controlling interest in our Consolidated
Statements of Income and Comprehensive Income.
19
Table of
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15.
Segment Disclosure
Our three operating divisions are our reportable
segments. The Adult Secure Services segment consists of the operations of
secure adult incarceration facilities. The Abraxas Youth and Family Services
segment consists of providing residential treatment and educational programs
and non-residential community-based programs to juveniles between the ages of
10 and 18 who have either been adjudicated or suffer from behavioral problems.
The Adult Community-Based Services segment consists of providing pre-release
and halfway house programs for adult offenders who are either on probation or
serving the last three to six-months of their sentences on parole and preparing
for re-entry into society at large as well as community-based treatment and
education programs as an alternative to incarceration. All of our customers and
long-lived assets are located in the United States of America. The accounting
policies of our reportable segments are the same as those described in the
summary of significant accounting policies in Note 2 in our 2009 Annual Report
on Form 10-K. Intangible assets are not included in each segments
reportable assets, and the amortization of intangible assets is not included in
the determination of a reportable segments operating income. We evaluate
performance based on income or loss from operations before general and
administrative expenses, incentive bonuses, amortization of intangibles,
interest and income taxes. Corporate and other assets are comprised primarily
of cash, accounts receivable, debt service fund, deposits, property and
equipment, deferred taxes, deferred costs and other assets. Corporate and other
expense from operations primarily consists of depreciation and amortization on
the corporate office facilities and equipment and specific general and
administrative charges pertaining to corporate personnel and is presented
separately as such charges cannot be readily identified for allocation to a
particular segment.
|
|
Three
Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Adult Secure Services
|
|
$
|
58,819
|
|
$
|
56,858
|
|
Abraxas Youth and Family Services
|
|
23,475
|
|
25,689
|
|
Adult Community-Based Services
|
|
17,712
|
|
17,163
|
|
Total revenues
|
|
$
|
100,006
|
|
$
|
99,710
|
|
|
|
|
|
|
|
Income (loss) from operations:
|
|
|
|
|
|
Adult Secure Services
|
|
$
|
13,500
|
|
$
|
17,118
|
|
Abraxas Youth and Family Services
|
|
(175
|
)
|
734
|
|
Adult Community-Based Services
|
|
5,636
|
|
4,767
|
|
Sub-total
|
|
18,961
|
|
22,619
|
|
General and administrative expenses
|
|
(5,759
|
)
|
(6,138
|
)
|
Amortization of intangibles
|
|
(132
|
)
|
(448
|
)
|
Corporate and other expenses
|
|
(205
|
)
|
(245
|
)
|
Total income from operations
|
|
$
|
12,865
|
|
$
|
15,788
|
|
|
|
March 31,
2010
|
|
December 31,
2009
|
|
Assets:
|
|
|
|
|
|
Adult Secure Services
|
|
$
|
358,999
|
|
$
|
356,247
|
|
Abraxas Youth and Family Services
|
|
102,194
|
|
103,276
|
|
Adult Community-Based Services
|
|
61,220
|
|
62,251
|
|
Intangible assets, net
|
|
14,361
|
|
14,498
|
|
Corporate and other
|
|
106,991
|
|
114,298
|
|
Total assets
|
|
$
|
643,765
|
|
$
|
650,565
|
|
20
Table of Contents
16.
Guarantor Disclosures
We
completed an offering of $112.0 million of Senior Notes in June 2004. The
Senior Notes are guaranteed by each of our 100% owned subsidiaries (Guarantor
Subsidiaries). MCF does not guarantee the Senior Notes (Non-Guarantor
Subsidiary). These guarantees are full and unconditional and are joint and
several obligations of the Guarantor Subsidiaries. The following condensed
consolidating financial information presents the financial condition, results
of operations and cash flows for the Parent, the Guarantor Subsidiaries and the
Non-Guarantor Subsidiary, together with the consolidating adjustments necessary
to present our results on a consolidated basis.
Condensed
Consolidating Balance Sheet as of March 31, 2010 (in thousands)
(unaudited)
|
|
|
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
Guarantor
|
|
Guarantor
|
|
|
|
|
|
|
|
Parent
|
|
Subsidiaries
|
|
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,871
|
|
$
|
175
|
|
$
|
15
|
|
$
|
|
|
$
|
18,061
|
|
Accounts receivable
|
|
1,978
|
|
56,390
|
|
70
|
|
|
|
58,438
|
|
Restricted assets
|
|
|
|
4,136
|
|
26,356
|
|
|
|
30,492
|
|
Prepaids and other
|
|
18,714
|
|
1,573
|
|
|
|
|
|
20,287
|
|
Total current assets
|
|
38,563
|
|
62,274
|
|
26,441
|
|
|
|
127,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
18
|
|
325,005
|
|
137,839
|
|
(5,588
|
)
|
457,274
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted assets
|
|
|
|
|
|
29,884
|
|
|
|
29,884
|
|
Deferred costs and other
|
|
70,193
|
|
21,844
|
|
4,613
|
|
(67,321
|
)
|
29,329
|
|
Investments in subsidiaries
|
|
99,401
|
|
1,856
|
|
|
|
(101,257
|
)
|
|
|
Total assets
|
|
$
|
208,175
|
|
$
|
410,979
|
|
$
|
198,777
|
|
$
|
(174,166
|
)
|
$
|
643,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
37,057
|
|
$
|
16,842
|
|
$
|
4,279
|
|
$
|
396
|
|
$
|
58,574
|
|
Current portion of long-term debt
|
|
|
|
11
|
|
13,400
|
|
|
|
13,411
|
|
Total current liabilities
|
|
37,057
|
|
16,853
|
|
17,679
|
|
396
|
|
71,985
|
|
Long-term debt, net of current portion
|
|
178,986
|
|
|
|
108,300
|
|
|
|
287,286
|
|
Deferred tax liabilities
|
|
22,283
|
|
94
|
|
|
|
2,607
|
|
24,984
|
|
Other long-term liabilities
|
|
5,681
|
|
14
|
|
67,506
|
|
(71,356
|
)
|
1,845
|
|
Intercompany
|
|
(293,497
|
)
|
294,659
|
|
|
|
(1,162
|
)
|
|
|
Total liabilities
|
|
(49,490
|
)
|
311,620
|
|
193,485
|
|
(69,515
|
)
|
386,100
|
|
Total Cornell Companies, Inc. stockholders
equity
|
|
257,143
|
|
99,359
|
|
5,292
|
|
(104,651
|
)
|
257,143
|
|
Non-controlling interest
|
|
522
|
|
|
|
|
|
|
|
522
|
|
Total equity
|
|
257,665
|
|
99,359
|
|
5,292
|
|
(104,651
|
)
|
257,665
|
|
Total liabilities and equity
|
|
$
|
208,175
|
|
$
|
410,979
|
|
$
|
198,777
|
|
$
|
(174,166
|
)
|
$
|
643,765
|
|
21
Table of
Contents
Condensed
Consolidating Balance Sheet as of December 31, 2009 (in thousands)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
27,386
|
|
$
|
317
|
|
$
|
21
|
|
$
|
|
|
$
|
27,724
|
|
Accounts
receivable
|
|
1,471
|
|
59,561
|
|
51
|
|
|
|
61,083
|
|
Restricted
assets
|
|
|
|
3,831
|
|
26,147
|
|
|
|
29,978
|
|
Prepaids and
other
|
|
20,024
|
|
1,466
|
|
|
|
|
|
21,490
|
|
Total current
assets
|
|
48,881
|
|
65,175
|
|
26,219
|
|
|
|
140,275
|
|
Property and
equipment, net
|
|
7
|
|
322,396
|
|
138,719
|
|
(5,599
|
)
|
455,523
|
|
Other assets:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
assets
|
|
|
|
|
|
27,017
|
|
|
|
27,017
|
|
Deferred
costs and other
|
|
66,623
|
|
20,029
|
|
4,758
|
|
(63,660
|
)
|
27,750
|
|
Investment in
subsidiaries
|
|
98,003
|
|
1,856
|
|
|
|
(99,859
|
)
|
|
|
Total assets
|
|
$
|
213,514
|
|
$
|
409,456
|
|
$
|
196,713
|
|
$
|
(169,118
|
)
|
$
|
650,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
42,192
|
|
$
|
15,725
|
|
$
|
4,370
|
|
$
|
|
|
$
|
62,287
|
|
Current
portion of long-term debt
|
|
|
|
13
|
|
13,400
|
|
|
|
13,413
|
|
Total current
liabilities
|
|
42,192
|
|
15,738
|
|
17,770
|
|
|
|
75,700
|
|
Long-term
debt, net of current portion
|
|
181,540
|
|
1
|
|
108,300
|
|
|
|
289,841
|
|
Deferred tax
liabilities
|
|
21,710
|
|
94
|
|
|
|
2,651
|
|
24,455
|
|
Other
long-term liabilities
|
|
5,766
|
|
|
|
63,750
|
|
(67,685
|
)
|
1,831
|
|
Intercompany
|
|
(296,432
|
)
|
297,594
|
|
|
|
(1,162
|
)
|
|
|
Total
liabilities
|
|
(45,224
|
)
|
313,427
|
|
189,820
|
|
(66,196
|
)
|
391,827
|
|
Total Cornell Companies, Inc.
stockholders equity
|
|
256,346
|
|
96,029
|
|
6,893
|
|
(102,922
|
)
|
256,346
|
|
Non-controlling
interest
|
|
2,392
|
|
|
|
|
|
|
|
2,392
|
|
Total equity
|
|
258,738
|
|
96,029
|
|
6,893
|
|
(102,922
|
)
|
258,738
|
|
Total liabilities and equity
|
|
$
|
213,514
|
|
$
|
409,456
|
|
$
|
196,713
|
|
$
|
(169,118
|
)
|
$
|
650,565
|
|
22
Table of
Contents
Condensed
Consolidating Statement of Income for the three months ended March 31,
2010
(in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
115,149
|
|
$
|
4,502
|
|
$
|
(24,147
|
)
|
$
|
100,006
|
|
Operating expenses, excluding depreciation and amortization
|
|
4,040
|
|
96,660
|
|
45
|
|
(24,062
|
)
|
76,683
|
|
Depreciation and amortization
|
|
|
|
3,830
|
|
880
|
|
(11
|
)
|
4,699
|
|
General and administrative expenses
|
|
5,740
|
|
|
|
19
|
|
|
|
5,759
|
|
Income (loss) from operations
|
|
(5,278
|
)
|
14,659
|
|
3,558
|
|
(74
|
)
|
12,865
|
|
Overhead allocations
|
|
(7,828
|
)
|
7,828
|
|
|
|
|
|
|
|
Interest, net
|
|
166
|
|
3,500
|
|
2,720
|
|
(201
|
)
|
6,185
|
|
Equity earnings in subsidiaries
|
|
3,331
|
|
|
|
|
|
(3,331
|
)
|
|
|
Income before provision for income taxes
|
|
5,715
|
|
3,331
|
|
838
|
|
(3,204
|
)
|
6,680
|
|
Provision for income taxes
|
|
2,435
|
|
|
|
|
|
396
|
|
2,831
|
|
Net income
|
|
3,280
|
|
3,331
|
|
838
|
|
(3,600
|
)
|
3,849
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
569
|
|
569
|
|
Income available to Cornell Companies, Inc.
|
|
$
|
3,280
|
|
$
|
3,331
|
|
$
|
838
|
|
$
|
(4,169
|
)
|
$
|
3,280
|
|
23
Table of Contents
Condensed
Consolidating Statement of Income for the three months ended March 31,
2009
(in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
4,502
|
|
$
|
117,820
|
|
$
|
4,502
|
|
$
|
(27,114
|
)
|
$
|
99,710
|
|
Operating expenses, excluding depreciation and amortization
|
|
4,138
|
|
95,739
|
|
42
|
|
(27,028
|
)
|
72,891
|
|
Depreciation and amortization
|
|
|
|
4,006
|
|
881
|
|
6
|
|
4,893
|
|
General and administrative expenses
|
|
6,119
|
|
|
|
19
|
|
|
|
6,138
|
|
Income (loss) from operations
|
|
(5,755
|
)
|
18,075
|
|
3,560
|
|
(92
|
)
|
15,788
|
|
Overhead allocations
|
|
(8,377
|
)
|
8,377
|
|
|
|
|
|
|
|
Interest, net
|
|
1,954
|
|
1,337
|
|
2,882
|
|
(220
|
)
|
5,953
|
|
Equity earnings in subsidiaries
|
|
8,360
|
|
|
|
|
|
(8,360
|
)
|
|
|
Income before provision for income taxes
|
|
9,028
|
|
8,361
|
|
678
|
|
(8,232
|
)
|
9,835
|
|
Provision for income taxes
|
|
3,771
|
|
|
|
|
|
330
|
|
4,101
|
|
Net income
|
|
5,257
|
|
8,361
|
|
678
|
|
(8,562
|
)
|
5,734
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
477
|
|
477
|
|
Income available to Cornell Companies, Inc.
|
|
$
|
5,257
|
|
$
|
8,361
|
|
$
|
678
|
|
$
|
(9,039
|
)
|
$
|
5,257
|
|
24
Table of
Contents
Condensed Consolidating Statement of Cash Flows for the three months
ended March 31, 2010 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(4,307
|
)
|
$
|
3,088
|
|
$
|
202
|
|
$
|
(1,017
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(3,227
|
)
|
|
|
(3,227
|
)
|
Payments to restricted debt payment account, net
|
|
|
|
|
|
(208
|
)
|
(208
|
)
|
Net cash provided by (used in) investing activities
|
|
|
|
(3,227
|
)
|
(208
|
)
|
(3,435
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments of line of
credit
|
|
(2,600
|
)
|
|
|
|
|
(2,600
|
)
|
Purchase and retirement of common stock
|
|
(3,000
|
)
|
|
|
|
|
(3,000
|
)
|
Payments on capital lease obligations
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Proceeds from exercise of stock options and employee stock
purchase plan
|
|
392
|
|
|
|
|
|
392
|
|
Net cash used in financing activities
|
|
(5,208
|
)
|
(3
|
)
|
|
|
(5,211
|
)
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and
cash equivalents
|
|
(9,515
|
)
|
(142
|
)
|
(6
|
)
|
(9,663
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
|
27,386
|
|
317
|
|
21
|
|
27,724
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
17,871
|
|
$
|
175
|
|
$
|
15
|
|
$
|
18,061
|
|
25
Table of
Contents
Condensed
Consolidating Statement of Cash Flows for the three months ended March 31,
2009 (in thousands) (unaudited)
|
|
Parent
|
|
Guarantor
Subsidiaries
|
|
Non-
Guarantor
Subsidiary
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
$
|
(5,727
|
)
|
$
|
3,276
|
|
$
|
362
|
|
$
|
(2,089
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
(3,168
|
)
|
|
|
(3,168
|
)
|
Payments to restricted debt payment account, net
|
|
|
|
|
|
(381
|
)
|
(381
|
)
|
Net cash used in investing activities
|
|
|
|
(3,168
|
)
|
(381
|
)
|
(3,549
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from line of credit
|
|
2,000
|
|
|
|
|
|
2,000
|
|
Payments on line of credit
|
|
(1,000
|
)
|
|
|
|
|
(1,000
|
)
|
Payments on capital lease obligations
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
Proceeds from exercise of stock options
|
|
299
|
|
|
|
|
|
299
|
|
Net cash provided by (used in) financing activities
|
|
1,299
|
|
(3
|
)
|
|
|
1,296
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease)
in cash and cash equivalents
|
|
(4,428
|
)
|
105
|
|
(19
|
)
|
(4,342
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at beginning of period
|
|
14,291
|
|
265
|
|
57
|
|
14,613
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents at end of period
|
|
$
|
9,863
|
|
$
|
370
|
|
$
|
38
|
|
$
|
10,271
|
|
26
Table of Contents
ITEM 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations.
General
Cornell
Companies, Inc. is a leading provider of correctional, detention,
educational, rehabilitation and treatment services outsourced by federal, state
and local government agencies. We provide a diversified portfolio of services
for adults and juveniles through our three operating divisions: (1) Adult
Secure Services; (2) Abraxas Youth and Family Services and (3) Adult
Community-Based Services. At March 31, 2010, we operated 63 facilities
with a total service capacity of 20,531 beds
and had five facilities with
a combined service capacity of 861 beds that were vacant.
Our facilities
are located in 15 states and the District of Columbia.
The following table sets forth for the periods indicated total
residential service capacity and contracted beds in operation at the end of the
periods shown, average contract occupancy percentages and total non-residential
service capacity.
|
|
Three Months Ended
March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Residential
|
|
|
|
|
|
Service
capacity (1)
|
|
19,284
|
|
17,634
|
|
Contracted
beds in operation (end of period) (2)
|
|
17,639
|
|
16,780
|
|
Average contract
occupancy based on contracted beds in operation (3) (4)
|
|
87.8
|
%
|
93.2
|
%
|
Non-Residential
|
|
|
|
|
|
Service
capacity (5)
|
|
2,108
|
|
2,558
|
|
(1)
|
|
Residential service
capacity is comprised of the number of beds currently available for service
in our residential facilities.
|
(2)
|
|
At
certain residential facilities, the contracted capacity is lower than the
facilitys service capacity. We could increase a facilitys contracted
capacity by obtaining additional contracts or by renegotiating existing
contracts to increase the number of beds covered. However, we may not be able
to obtain contracts that provide occupancy levels at a facilitys service
capacity or be able to maintain current contracted capacities in future
periods.
|
(3)
|
|
Occupancy
percentages reflect less than normalized occupancy during the start-up phase
of any applicable facility, resulting in a lower average occupancy in periods
when we have substantial start-up activities.
|
(4)
|
|
Average
contract occupancy percentages are calculated based on actual occupancy for
the period as a percentage of the contracted capacity for residential
facilities in operation. These percentages do not reflect the operations of
non-residential community-based programs. At certain residential facilities,
our contracted capacity is lower than the facilitys service capacity.
Additionally, certain facilities have and are currently operating above the
contracted capacity. As a result, average contract occupancy percentages can
exceed 100% if the average actual occupancy exceeded contracted capacity.
|
(5)
|
|
Service
capacity for non-residential programs is based on either contractual terms or
an estimate of the number of clients to be served. We update these estimates
at least annually based on the programs budget and other factors.
|
During the three
months ended March 31, 2010 we initiated the transition plan at our D. Ray
James Prison from our current customer, the Georgia Department of Corrections (GDOC),
to the Federal Bureau of Prisons (BOP) (anticipated to take through the
fourth quarter of 2010). This will include the ramp-down of the current
population, preparation of the facility for the new customer and subsequent
ramp-up of the BOP population.
Although we believe we
will continue to see steady demand across our various business segments and
customer base (federal, state and local) in 2010, we are monitoring the
declining economic trends (which began in 2008) and the related impact on
government budget plans and the effect tightened spending plans could have on
our business (with respect to possible areas including current utilization and
per diem rates, among others.)
We expect key areas of focus
for our performance in 2010 to include the transition of the customer at our D.
Ray James Prison from GDOC to the BOP (by the fourth quarter of 2010). As
noted, this will include the ramp-down of the current population, preparation
of the facility for the new customer and subsequent ramp-up of the BOP
population. We also intend to focus on
the options for our Great Plains Correctional Facility, including the continued
utilization by the Arizona Department of Corrections of the facility or the
potential utilization by other customers.
We also plan to remain focused on our operating margins, on increasing
utilization (particularly in the Abraxas Youth and Family Services division and
in our Adult Secure division) and improving customer mix as we believe those
initiatives are the key elements of our financial performance.
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Management Overview
Demand
.
Our business is driven generally by demand for incarceration or
treatment services, and specifically by demand for private incarceration or
treatment services, within our three primary business segments: Adult Secure
Services; Abraxas Youth and Family Services; and Adult Community-Based
Services. The demand for adult and juvenile corrections and treatment services
has generally increased at a steady rate over the past ten years, largely as a
result of increasing sentence terms and/or mandatory sentences for criminals as
well a greater range of criminal acts, increasing demand for incarceration of
illegal aliens and a public recognition of the need to provide services to
juveniles that will improve the possibility that they will lead productive
lives. Moreover, demand for our services is also affected by the amount of
available capacity in the government systems to enable governments to provide
the services themselves, as well as desire and ability of these systems to add
additional capacity. In addition, the balance between community-based
corrections treatment of adults as an alternative to traditional incarceration
continues to be analyzed by many political and societal parties. Among other things, we monitor federal, state
and industry communications and statistics relative to trends in prison
populations, juvenile justice statistics and initiatives, and developments in
alternatives to traditional incarceration or detention of adults for
opportunities to expand our scope or delivery of services.
The federal government
contracts with private providers for the incarceration of adults, whether they
are serving prison sentences, detained as illegal aliens, detained in
anticipation of pending judicial administration or transitioning from prison to
society. Chief among the federal
agencies which use private providers are the BOP, U.S. Immigration and Customs
Enforcement (ICE) and United States Marshalls Service (USMS). We provide
adult secure and adult community-based services to the federal government. Most
of the federal involvement in juvenile administration in the federal system is
handled via Medicare and Medicaid assistance to state governments. Although
there are circumstances in which we may contract with a federal agency on a
sole source basis, the primary means by which we secure a contract with a
federal agency is via the RFP bidding process.
From time to time, we contract to provide management services to a local
governmental unit who then bids on a federal contract.
States and smaller
governmental units remain divided on the issue of private prisons and private
provision of juvenile and community-based programs, although a majority of
states permit private provision for our services. We anticipate that increasing budget pressure
on states and smaller governmental units may cause more states and smaller
governmental units to consider utilizing private providers such as us to provide
these services on a more economical basis. We believe capital budget
constraints among prison agencies may encourage them to continue to explore
outsourcing to private operators as an alternative to deploying their own
capital for prison construction or major refurbishment. Although it varies from
governmental unit to governmental unit, the primary political forces who
typically oppose privatization of prisons are organized labor and religious
groups.
Private juvenile and
community-based programs are utilized by states and local governmental units
and are organized on a profit and not-for-profit basis. We monitor opportunities in these segments
via our corporate and business division development officers. Many opportunities are not published in any manner
and, accordingly, we believe that taking the initiative at the state and local
levels is key in developing sole source opportunities.
Performance
.
We track a number of factors as we monitor
financial performance. Chief among them
are:
·
capacity (the
number of beds within each business segments facilities),
·
occupancy
(utilization),
·
per diem
reimbursement rates,
·
revenues,
·
operating
margins, and
·
operating
expenses.
Capacity.
Capacity, commonly expressed
in terms of number of beds, is primarily impacted by the number and size of the
facilities we own or lease and the facilities we operate on behalf of a third
party owner or lessee. We view capacity
as one of the measures of our development efforts, through which we may increase
capacity by adding new projects or by expanding existing projects (as we have
done in 2007 through 2009 at several of our facilities including Great Plains
Correctional Facility, D. Ray James Prison and the Hudson Correctional
Facility). As part of the evaluation of
our development efforts, we will assess (a) whether a given development
project was brought into service in accordance with our expectation as to time
and expense; and (b) the number of projects in development or under
consideration at the relevant point in time.
In addition to the focus on new projects, capacity will reflect our
success in renewing and maintaining existing contracts and facilities. It will also reflect any closure of programs
or facilities due to underutilization or failure to earn an adequate
risk-adjusted rate of return. We must
also be cognizant of the possibility that state or local budgetary limitations
may cause the contractual commitment to a given facility to be reduced or even
eliminated, which would require us to either secure an alternate customer or
close the operation.
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Occupancy.
Occupancy is typically
expressed in terms of percentage of contract capacity utilized. We look at occupancy to assess the efficacy
of both our efforts to market our facilities and our efforts to retain existing
customers or contracts. Because revenue
varies directly with occupancy, occupancy is a driver of our revenues. Our
industry experiences significant economies of scale, whereby as occupancy
rises, operating costs per resident decline. Some of our contracts are take-or-pay,
meaning that the agency making use of the facility is obligated to pay for beds
even though they are not used.
Historically, occupancy percentages in many of our facilities have been
high and we are mindful of the need to maintain such occupancy levels. As new development projects are brought into
service, occupancy percentages may decline until the projects reach full
utilization (as, for example, with the activation of the 1,100 bed expansion at
Great Plains Correctional Facility during the fourth quarter of 2008, the 700
bed expansion at D. Ray James Prison during the second quarter of 2009 and the
1,250 bed Hudson Correctional Facility during the fourth quarter of 2009).
Where we have commitments for utilization before the commencement of
operations, occupancy percentages reflect the speed at which a facility
achieves full service/implementation. However, we may decide to undertake
development projects without written commitments to make full use of a
facility. In these instances, we have performed our own assessment, based on
discussions with local government or other potential customer representatives
and analysis of other factors, of the demand for services at the facility. There is no assurance that we would recover
our initial investment in these projects.
We will monitor occupancy as a measure of the accuracy of our estimation
of the demand for the services of a development facility, and will incorporate
this information in future assessments of potential projects.
In addition, the ramp phase for our youth
facilities is typically longer than that experienced in our adult facilities,
which will impact our occupancy in the Abraxas Youth and Family Services
division in a given period.
Per Diem Reimbursement
Rates.
Per diem reimbursement rates
are another key element of our gross revenue and operating margin since per
diem contracts represent a majority of our revenues (59.3% for the three months
ended March 31, 2010). Per diem
rates are a function of negotiation between management and a governmental unit
at the inception of a contract or through the bidding process. Actual per diem rates vary dramatically
across our business segments, and within each business segment depending upon
the particular service or program provided. The initial per diem rates often
change during the term of a contract in accordance with a schedule. The amount of the change can be a fixed
amount set forth within the contract, an amount determined by formulas set
forth within the contract or an amount determined by negotiations between
management and the governmental unit (often these negotiations are along the
same lines as the original per diem negotiation a review of expenses and
approval of an amount to recompense for expenses and assure the potential of an
operating profit). In recent years, as
budgetary pressures on governmental units have increased, some of our customers
have negotiated relief from formulaic increase provisions within their
agreements or have declined to include in their appropriation legislation
amounts that would increase the per diem rates payable under the contract.
Based on the economic turmoil which began in the second half of 2008, we are
expecting such pressures to continue in 2010 for many of our customers. In
similar prior situations we have attempted to mitigate the impact of these
developments by negotiating services provided, obtaining commitments for
increased volume and other measures.
Customers may choose to reduce per diem rates through
the reduction of contract services we may provide.
We may also choose to
consider terminating an existing relationship at a given facility and replacing
it with a new customer (as was done with our Great Plains Correctional Facility
in 2007
and as we
intend to do with the D. Ray James Prison in 2010).
Revenues.
We derive
substantially all of our revenues from providing adult corrections and
treatment and juvenile justice, educational and treatment services outsourced
by federal, state and local government agencies in the United States. Revenues
for our services are generally recognized on a per diem rate based upon the
number of occupant days or hours served for the period, on a guaranteed
take-or-pay basis or on a cost-plus reimbursement basis. For the three months
ended March 31, 2010, our revenue base consisted of 59.3% for services
provided under per diem contracts, 35.5% for services provided under
take-or-pay and management contracts, 3.5% for services provided under
cost-plus reimbursement contracts and 1.7% for services provided under
fee-for-service contracts. For the three
months ended March 31, 2009, our revenue base consisted of 61.1% for
services provided under per diem contracts, 33.5% for services provided under
take-or-pay and management contracts, 3.4% for services provided under
cost-plus reimbursement contracts, 1.8% for services provided under
fee-for-service contracts and 0.2% from other miscellaneous sources.
Revenues can fluctuate from
period to period due to changes in government funding policies, changes in the
number or types of clients referred to our facilities by governmental agencies,
changes in the types of services delivered to our customers, the opening of new
facilities or the expansion of existing facilities and the termination of
contracts for a facility or the closure (or temporary program consolidation) of
a facility.
Factors considered in
determining billing rates to charge include: (1) the programs specified by
the contract and the related staffing levels and support costs; (2) wage
levels customary in the respective geographic areas; (3) whether the
proposed facility is to be leased or purchased; and (4) the anticipated
average occupancy levels that could reasonably be expected to be maintained and
the duration of time required to reach such occupancy levels.
Revenues-Adult Secure
Services.
Revenues for
our Adult Secure Services division are primarily generated from per diem,
take-or-pay and management contracts.
For the three months ended March 31, 2010, and 2009, we realized
average per diem rates on our adult secure facilities of approximately $55.64
and $53.75, respectively. The 2010 average per diem rate benefited from the
activation
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of our Hudson Correctional Facility during
the fourth quarter of 2009. We periodically have experienced pressure from
contracting governmental agencies to limit or even reduce per diem rates. Many
of these governmental entities are under severe budget pressures and we
anticipate that governmental agencies may periodically approach us in 2010
about per diem rate concessions (or decline to provide funding for contractual
rate increases). Decreases in, or the
lack of anticipated increases in, per diem rates could adversely impact our
operating margin.
Revenues-Abraxas Youth and Family
Services.
Revenues for
our Abraxas Youth and Family Services division are primarily generated from per
diem, fee-for-service and cost-plus reimbursement contracts. For the three months ended March 31,
2010 and 2009, we realized average per diem rates on our residential youth and
family services facilities of approximately $194.65 and $197.51, respectively.
For the three months ended March 31, 2010 and 2009, we realized average
fee-for-service rates for our non-residential community-based Abraxas Youth and
Family Services facilities and programs, including rates that are limited by
Medicaid and other private insurance providers, of approximately $48.47 and
$45.04, respectively. The changes in the average fee-for-service rates are due
to changes in the mix of services provided at our non-residential facilities.
The majority of our Abraxas Youth and Family Services contracts renew annually.
Revenues-Adult Community-Based
Services.
Revenues for
our Adult Community-Based Services division are primarily generated from per
diem and fee-for-service contracts. For the three months ended March 31,
2010 and 2009, we realized average per diem rates on our residential adult
community-based facilities of approximately $70.29 and $67.25, respectively.
For the three months ended March 31, 2010 and 2009, we realized average
fee-for-service rates on our non-residential Adult Community-Based Services
facilities and programs of approximately $9.42 and $9.07, respectively. Our average fee-for-service rates fluctuate
from period to period principally due to changes in the mix of services
provided by our various Adult Community-Based Services programs and facilities.
Operating Margins.
We have historically
experienced higher operating margins in our Adult Secure Services and Adult
Community-Based Services divisions as compared to our Abraxas Youth and Family
Services division. Our operating margin, in a given period, will be impacted by
both utilization at active facilities as well as by those facilities which may
be either dormant or have been reactivated during the period. As previously
discussed, we have expanded several of our Adult Secure facilities (D. Ray
James Prison, Great Plains Correctional Facility and Walnut Grove Youth Correctional
Facility, for example), which provides the opportunity to leverage existing
infrastructure. Additionally, our operating margins within a division can vary
from facility to facility based on whether a facility is owned or leased, the
level of competition for the contract award, the proposed length of the
contract, the mix of services provided, the occupancy levels for a facility,
the level of capital commitment required with respect to a facility, the
anticipated changes in operating costs over the term of the contract and our
ability to increase a facilitys contract revenue. Under take-or-pay contracts,
such as the contract at the Moshannon Valley Correctional Center, operating
margins are typically higher during the early stages of the contract as the facilitys
population ramps up (as revenues are received at contract percentages
regardless of actual occupancy). As the variable costs (primarily
resident-related and certain facility costs) increase with the growth in
population, operating margins will generally decline to a stabilized level.
Such an impact is anticipated at our D.
Ray James Prison upon the activation of its transition to the BOP in the fourth
quarter of 2010.
A decline in occupancy at our Abraxas Youth and
Family Services facilities can have a more significant impact on operating
margins than our Adult Secure Services division due to the longer periods
typically required to ramp resident population at a youth facility.
We have experienced and
expect to continue to experience interim period operating margin fluctuations
due to factors such as the number of calendar days in the period, higher
payroll taxes (generally in the first half of the year) and salary and wage
increases and insurance cost increases that are incurred prior to certain contract
rate increases. Periodically, many of the governmental agencies with whom we
contract may experience budgetary pressures and may approach us to limit or
reduce per diem rates (including contractual price increases as well). We
experienced such behavior in 2009 and we anticipate such customer behavior will
continue in 2010. Decreases in, or the lack of anticipated increases in, per
diem rates could adversely impact our operating margin. Additionally, a
decrease in per diem rates without a corresponding decrease in operating
expenses could also adversely impact our operating margin.
Furthermore, our margins may be
negatively impacted during a customer transition at a facility due to required
population ramp patterns and timing as we change customers.
Operating Expenses.
We track
several different areas of our operating expenses. Foremost among these expenses are employee
compensation and benefits and expenses, risk related areas such as general
liability, medical and workers compensation, client/inmate costs such as food,
clothing, medical and programming costs, financing costs and administrative
overhead expenses. Increases or decreases in one or more of these expenses,
such as our experience with rising insurance costs, can have a material effect on
our financial performance. Operating
expenses are also impacted by decisions to close or terminate a particular
program or facility. Such decisions are
based on our assessments of operating results, operating efficiency and
risk-adjusted returns and are an ongoing part of our portfolio management. In addition, decisions to restructure
employee positions will typically increase period costs initially (at the time
of such actions), but generally reduce post-restructuring expense levels.
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We are responsible for all facility operating
costs, except for certain debt service and interest or lease payments for
facilities where we have a management contract only. At these facilities, the
facility owner is responsible for all debt service and interest or lease
payments related to the facility. We are responsible for all other operating
expenses at these facilities. We operated 11 and 14 facilities under management
contracts at March 31, 2010 and 2009, respectively. Included in the 11
facilities under management contracts at March 31, 2010 were the Walnut
Grove Youth Correctional Facility and the eight Los Angeles County Jails, which
represented 1,714 beds of service capacity, or approximately 96.5%, of the
residential service capacity represented by management contracts.
A majority of our facility
operating costs consists of fixed costs. These fixed costs include lease and
rental expense, insurance, utilities and depreciation. As a result, when we commence operation of
new or expanded facilities, fixed operating costs may increase. The amount of
our variable operating costs, including food, medical services, supplies and
clothing, depend on occupancy levels at the facilities. Our largest single
operating cost, facility payroll expense and related employment taxes and
expenses, has both a fixed and a variable component. We can adjust a facilitys
staffing levels and the related payroll expense to a certain extent based on
occupancy at a facility; however a minimum fixed number of employees is
required to operate and maintain any facility regardless of occupancy levels.
Personnel costs are subject to increases in tightening labor markets based on
local economic environments and other conditions.
We incur pre-opening and
start-up expenses including payroll, benefits, training and other operating
costs prior to opening a new or expanded facility (including customer
transitions) and during the period of operation while occupancy is ramping up.
These costs vary by contract (and the pace/scale of the activation and related
population ramp).
We
incurred such costs at our Hudson Correctional Facility in conjunction with its
activation during the fourth quarter of 2009 and would also expect to incur
similar costs in conjunction with the planned customer transition at our D. Ray
James Prison in the second half of 2010.
Since pre-opening and
start-up costs are generally factored into the revenue per diem rate that is
charged to the contracting agency, we typically expect to recover these upfront
costs over the life of the contract. Because occupancy rates during a facilitys
start-up phase typically result in capacity under-utilization for at least 90
to 180 days, we may incur additional post-opening start-up costs. We do not
anticipate post-opening start-up costs at any adult secure facilities operated
under any future contracts with the BOP which are take-or-pay contracts,
meaning that the BOP will generally pay a certain percentage of the contractual
monthly revenue once the facility opens, regardless of actual occupancy (with
an adjusted percentage level (up to 90%) as the population achieves certain
thresholds).
Newly opened facilities are
staffed according to applicable regulatory or contractual requirements when we
begin receiving offenders or clients. Offenders or clients are typically
assigned to a newly opened facility on a phased-in basis over a one- to
six-month period. Our start-up period for new juvenile operations is generally
up to 12 months from the date we begin recognizing revenue unless break-even
occupancy levels are achieved before then. The actual time required to ramp a
juvenile facility (with an approximate capacity, for example, of 100 to 200
beds) may be a period of one to three years. Our start-up period for new adult
operations is generally up to nine months from the date we begin recognizing
revenue unless break-even occupancy levels are achieved before then. The approximate time to ramp an adult
facility of approximately 1,000 beds may be a period of three to six months,
depending upon the customer requirements.
Although we typically recover these upfront costs over the life of the
contract, quarterly results can be substantially affected by the timing of the
commencement of operations as well as the development and construction of new
facilities.
Working capital requirements
generally increase immediately prior to commencing management of a new or
expanded facility as we incur start-up costs and purchase necessary equipment
and supplies before facility management revenue is realized.
General and administrative expenses consist
primarily of costs for corporate and administrative personnel who provide
senior management, legal, finance, accounting, human resources, investor
relations, payroll and information systems, costs of business development and
outside professional and consulting fees.
Recent Developments
Merger Agreement
On April 18, 2010,
the Company entered into an Agreement and Plan of Merger (Agreement) with The
GEO Group (NYSE:GEO) (GEO), a private provider of correctional, detention,
and residential treatment services to federal, state and local government
agencies around the globe. Pursuant to the Agreement, The GEO Group will
acquire Cornell for stock and/or cash at an estimated enterprise value of $685
million based on the closing prices of both companies stock on April 16,
2010, including the assumption of approximately $300 million in Cornell debt,
excluding cash.
Under the terms of the
definitive agreement, stockholders of Cornell will have the option to elect to
receive either (x) 1.3 shares of GEO common stock for each share of
Cornell common stock or (y) an amount of cash consideration equal to the
greater of (i) the
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fair market value of one
share of GEO common stock plus $6.00 or (ii) the fair market value of 1.3
shares of GEO common stock. In order to preserve the tax-deferred treatment of
the transaction, no more than 20% of the outstanding shares of Cornell Common
Stock may be exchanged for the cash consideration. If elections are made such
that the aggregate cash consideration to be received by Cornell stockholders
would exceed $100 million in the aggregate, such excess amount may be paid at
the election of GEO in shares of GEO common stock or in cash.
The merger is expected to
close in the third quarter of 2010, subject to the approval of the issuance of
GEO common stock by GEOs shareholders, approval of the transaction by Cornells
stockholders and federal regulatory agencies including but not limited to the
expiration or termination of the waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as well as the fulfillment of other
customary terms and conditions. The Merger Agreement also contains covenants
with respect to the operation of the Companys business between signing of the
Merger Agreement and closing of the Merger.
Litigation
Relating to the Merger
On April 27, 2010, a
putative stockholder class action was filed in the District Court for Harris
County, Texas by Todd Shelby against Cornell, members of the Cornell board of
directors, individually, and GEO.
The complaint alleges, among
other things, that the Cornell directors breached their duties by entering into
the Agreement without first taking steps to obtain adequate, fair and maximum
consideration for Cornells stockholders by shopping the company or initiating
an auction process, by structuring the transaction to take advantage of Cornells
low current stock valuation, and by structuring the transaction to benefit GEO
while making an alternative transaction either prohibitively expensive or
otherwise impossible, and that Cornell and GEO have aided and abetted such
breaches by Cornells directors.
Among other things, the complaint seeks to enjoin
Cornell, its directors and GEO from completing the merger and seeks a
constructive trust over any benefits improperly received by the defendants as a
result of their alleged wrongful conduct.
D. Ray James Prison
In
January 2010, we received a contract award from the BOP to house up to
2,507 low-security adult males at the facility. The contract has an anticipated
effective date of October 1, 2010 and has an initial four-year term with
three two-year option periods. We anticipate we will spend approximately $8.0
million prior to the effective date of the BOP contract in order to prepare the
facility for the BOP inmates. In conjunction with the preparations for the BOP
population during 2010, we will be transitioning from the Georgia Department of
Corrections inmates currently housed at this facility.
Liquidity and Capital
Resources
General
.
Our primary capital requirements are for (1) purchases,
construction or renovation of new facilities, (2) expansions of existing
facilities, (3) working capital, (4) pre-opening and start-up costs
related to new operating contracts, (5) acquisitions of businesses or
facilities, (6) information systems hardware and software and (7) furniture,
fixtures and equipment purchases. Working capital requirements generally
increase immediately prior to commencing management of a new facility (or
activation of a facility expansion) as we incur start-up costs and purchase
necessary equipment and supplies before related facility revenue is realized.
Cash Flows From
Operating Activities.
Cash flows used in operating activities were
approximately $1.0 million for the three months ended March 31, 2010
compared to cash used in operating activities of approximately $2.1 million for
the three months ended March 31, 2009, principally due to: (1) a
reduction in net income during the first quarter of 2010 as compared to the
first quarter of 2009 of approximately $1.9 million, (2) an increase in
other restricted assets of approximately $3.2 million, and (3) a decrease
in accounts receivable-trade due to the timing and receipt of customer
payments.
Cash Flows From Investing Activities
.
Cash used in
investing activities was approximately $3.4 million for the three months ended March 31,
2010, due primarily to capital expenditures of $3.2 million related to our
Hudson Correctional Facility and D. Ray James Prison. There were also net
payments for the three months ended March 31, 2010 to the restricted debt
payment account of $0.2 million.
Cash used in investing activities was approximately $3.5 million for the
three months ended March 31, 2009, due primarily to capital expenditures
of approximately $3.2 million, primarily related to the facility expansion
projects at the D. Ray James Prison and the Great Plains Correctional Facility.
There were also net payments to the restricted debt payment account of
approximately $0.4 million.
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Cash Flows From
Financing Activities
.
Cash
used in financing activities was approximately $5.2 million for the
three months ended March 31, 2010, due to payments on our Amended Credit
Facility of $2.6 million and the purchase of $3.0 million of our common
stock. Additionally, we had proceeds
from the exercise of stock options and employee stock purchase plan of
approximately $0.4 million. Cash
provided by financing activities was approximately $1.3 million for the three
months ended March 31, 2009, due primarily to net borrowings on our
Amended Credit Facility of $1.0 million and proceeds from the exercise of stock
options of $0.3 million.
Treasury Stock
Repurchases.
We repurchased 145,473 shares of our
common stock in the three months ended March 31, 2010. See Part II,
Item 2. All of these shares were retired.
We did not repurchase any of our common stock in the three months ended March 31,
2009. U
nder the terms of our Senior Notes and our Amended Credit Facility, we
can purchase shares of our stock subject to certain cumulative restrictions.
Long-Term Credit Facilities.
Our Amended
Credit
Facility provides for borrowings up to $100.0 million (including letters of
credit) and matures in December 2011. At our election, outstanding
borrowings bear interest at either the LIBOR rate plus a margin ranging from
1.50% to 2.25%, or a rate which ranges from 0.00% to 0.75% above the applicable
prime rate. The applicable margins are subject to adjustments based on our
total leverage ratio.
The available commitment under our Amended Credit
Facility was approximately $20.5 million at March 31, 2010. We had outstanding borrowings under our
Amended Credit Facility of $67.4 million and we had outstanding letters of
credit of approximately $12.1 million at March 31, 2010. Subject to certain requirements, we have the
right to increase the commitments under our Amended Credit Facility up to
$150.0 million, although the indenture for our Senior Notes limits our ability,
subject to certain conditions, to expand the Amended Credit Facility beyond
$100.0 million. We can provide no assurance that all of the banks that have
made commitments to us under our Amended Credit Facility would be willing to
participate in an expansion to the Amended Credit Facility should we desire to
do so. The Amended Credit Facility
is
collateralized by substantially all of our assets, including the assets and
stock of all of our subsidiaries. The Amended Credit Facility is not
collateralized by the assets of MCF.
Our Amended Credit Facility contains
certain financial and other restrictive covenants that limit our ability to engage
in certain activities. Our ability to borrow under the Amended Credit Facility
is subject to compliance with certain financial covenants, including bank
leverage, total leverage and fixed charge coverage rates. At March 31,
2010, we were in compliance with all such covenants.
Our Amended Credit Facility includes
other restrictions that, among other things, limit our ability to: incur
indebtedness; grant liens; engage in mergers, consolidations and liquidations;
make investments, restricted payments and asset dispositions; enter into
transactions with affiliates; and engage in sale/leaseback transactions.
MCF is obligated for the outstanding
balance of its 8.47% Taxable Revenue Bonds, Series 2001. The bonds bear interest at a rate of 8.47%
per annum and are payable in semi-annual installments of interest and annual
installments of principal. All unpaid
principal and accrued interest on the bonds is due on the earlier of August 1,
2016 (maturity) or as noted under the bond documents.
The
bonds are limited, nonrecourse obligations of MCF and secured by the property
and equipment, bond reserves, assignment of subleases and substantially all
assets related to the facilities included in the 2001 Sale and Leaseback
Transaction (in which we sold eleven facilities to MCF). The bonds are not guaranteed by Cornell.
In
June 2004, we issued $112.0 million in principal of 10.75% Senior Notes
the (Senior Notes) due July 1, 2012.
The Senior Notes are unsecured senior indebtedness and are guaranteed by
all of our existing and future subsidiaries (collectively, the Guarantors). The Senior Notes are not guaranteed by MCF
(the Non-Guarantor). Interest on the
Senior Notes is payable semi-annually on January 1 and July 1 of each
year, commencing January 1, 2005. On or after July 1, 2008, have the right
to redeem all or a portion of the Senior Notes at the redemption prices
(expressed as a percentage of the principal amount) listed below, plus accrued
and unpaid interest, if any, on the Senior Notes redeemed, to the applicable
date of redemption, if redeemed during the 12-month period commencing on July 1
of each of the remaining years indicated below:
Year
|
|
Percentages
|
|
|
|
|
|
2009
|
|
102.688
|
%
|
2010 and
thereafter
|
|
100.000
|
%
|
As the Senior Notes are redeemable at our option
(subject to the requirements noted) we anticipate we will monitor the capital
markets and continue to assess our capital needs and our capital structure,
including a potential refinancing of the Senior Notes.
Upon the occurrence of
specified change of control events, unless we have exercised our option to
redeem all the Senior Notes as described above, each holder will have the right
to require us to repurchase all or a portion of such holders Senior Notes at a
purchase price in cash equal to 101% of the aggregate principal amount of the
notes repurchased plus accrued and unpaid interest, if any, on the
33
Table of Contents
Senior Notes repurchased, to the applicable
date of purchase. The Senior Notes were
issued under an indenture which limits our ability and the ability of our
Guarantors to, among other things, incur additional indebtedness, pay dividends
or make other distributions, make other restricted payments and investments,
create liens,
incur
restrictions on the ability of the Guarantors to pay dividends or other
payments to us,
enter into transactions with affiliates, and engage
in mergers, consolidations and certain sales of assets.
Future Liquidity
Our shelf registration statement under Form S-3
for potential offerings from time to time of up to $75.0 million in gross
proceeds of debt securities, common stock, preferred stock, warrants or certain
other securities was declared effective by the Securities and Exchange
Commission in September 2008.
We expect to use existing cash balances, internally
generated cash flows and borrowings from our Amended Credit Facility to fulfill
anticipated obligations such as capital expenditures, working-capital needs and
scheduled debt maturities over at least the next twelve months. As of March 31, 2010, we had
approximately $20.5 million of available capacity under our Amended Credit
Facility. We will continue to analyze our
capital structure, including a potential refinancing of our Senior Notes and
financing for our expected future capital expenditures, including any potential
acquisitions. We will consider potential
acquisitions from time to time. Our
principal focus for acquisitions is anticipated to be in our Adult Secure and
Adult Community-Based divisions, although we would also pursue attractively
priced acquisitions in our Abraxas Youth and Family Services division. We may decide to use internally generated
funds, bank financing, equity issuances, debt issuances or a combination of any
of the foregoing to finance our future capital needs.
We may also seek, from time to time, to
retire or purchase some of our common stock and/or outstanding debt through
open market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on
prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. In July 2009,
our Board of Directors authorized a stock repurchase program which provides for
up to $10.0 million in purchases through December 2010. In September 2009, we adopted a 10b5-1
Plan to facilitate purchases of our common stock pursuant to such stock
repurchase plan. As noted, we purchased approximately $3.0 million of our
common stock during the three months ended March 31, 2010. The Company may
also repurchase our common stock in open market purchases. As a result of the
proposed Merger with GEO, we terminated the 10B5-1 Plan and we do not intend to
repurchase further shares of our common stock pending the Merger. At March 31, 2010, we believe we have
sufficient liquidity necessary to complete those projects (including the
facility maintenance improvements to be performed in association with the
contract transition preparation at D. Ray James Prison) for which we have
outstanding commitments.
Our internally generated cash flow is directly
related to our business. Should the private corrections and juvenile businesses
deteriorate, or should we experience poor results in our operations, cash flow
from operations may be reduced. We have, however, continued to generate
positive cash flow from operating activities over recent years and expect that
cash flow will continue to be positive over the next year. Our access to debt
and equity markets may be reduced or closed to us due to a variety of events,
including, among others, industry conditions, general economic conditions,
market conditions, credit rating agency downgrades of our debt and/or market perceptions
of us and our industry. The volatility
seen in the financial markets beginning in the third quarter of 2008 and
continuing throughout 2009 is expected to be present (at some level) for the
near term. Such volatility could result
in decreased availability of capital at economical terms (or at various times)
and could also put additional financial and budgetary pressure on our
customers. Such conditions could
potentially result in our inability to pursue additional future growth
opportunities (such as facility expansions or new facility construction) and,
if coupled with unexpected client, operational or other issues affecting our
cash flow, in a need to seek additional financing at terms we would otherwise
not accept.
In
addition, our accounts receivable are with federal, state, county and local
government agencies, which we believe generally reduces our credit risk.
However, it is possible that situations such as continuing budget resolutions,
delayed passage of budgets or budget pressures may increase the length of
repayment of certain of these receivables. For example, during 2009 the State
of California notified vendors providing services to the state that it would
temporarily issue IOUs. We received IOUs from the State of California which were
subsequently paid in full during the third quarter of 2009. We do not currently
hold any IOUs from the State of California. In addition, delays in the passage
of budgets (such as experienced in the State of Pennsylvania in 2009) may lead
to temporary delays in the repayment of our receivables from operations in such
states. This would lead to a temporary increase in our receivables, as
evidenced by the increase in our accounts receivable-trade in the third quarter
of 2009. As the State of Pennsylvania did not pass a fiscal 2010 budget until
mid-October 2009, the majority of the cities and counties in Pennsylvania
chose to defer their payments (during the state budget impasse present through
the third quarter of 2009) until the state budget had been adopted. Subsequent
to the passage of the states fiscal 2010 budget, our various Pennsylvania
customers returned to their historic payment patterns. While we will closely
monitor such situations, we do not currently expect this to have a significant
negative impact on the repayment of our receivables related to our facilities
in such locations.
34
Table of
Contents
Results of Operations
The following table sets forth for the periods indicated the
percentages of revenues represented by certain items in our consolidated statements
of operations.
|
|
Three Months
Ended March 31,
|
|
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
Revenues
|
|
100.0
|
%
|
100.0
|
%
|
Operating expenses, excluding depreciation and
amortization
|
|
76.6
|
|
73.1
|
|
Depreciation and amortization
|
|
4.7
|
|
4.9
|
|
General and administrative expenses
|
|
5.8
|
|
6.2
|
|
Income from operations
|
|
12.9
|
|
15.8
|
|
Interest expense, net
|
|
6.2
|
|
5.9
|
|
Income from operations before provision for income
taxes
|
|
6.7
|
|
9.9
|
|
Provision for income taxes
|
|
2.8
|
|
4.1
|
|
Net income
|
|
3.9
|
|
5.8
|
|
Non-controlling interest
|
|
0.6
|
|
0.5
|
|
Income available to shareholders
|
|
3.3
|
%
|
5.3
|
%
|
Three Months Ended March 31,
2010 Compared to Three Months Ended March 31, 2009
Revenues
. Revenues increased approximately $0.3
million, or 0.3%, to $100.0 million for the three months ended March 31,
2010 from approximately $99.7 million for the three months ended March 31,
2009.
Adult Secure Services
. Adult Secure
Services revenues increased approximately $1.9 million, or 3.3%, to $58.8
million for the three months ended March 31, 2010, from approximately $56.9
million for the three months ended March 31, 2009, due primarily to
revenues of $4.6 million at the Hudson Correctional Facility which began
operations in November 2009. This
increase in revenue was offset by (1) a decrease in revenues of $1.2
million and $1.5 million, respectively, due to the termination of our contracts
at the Baker Community Correctional Facility (Baker) and the Mesa Verde
Community Correctional Facility (Mesa Verde) in December 2009.
At March 31, 2010, we operated nine
adult secure facilities with an aggregate service capacity of 14,169. Additionally, we had two vacant facilities
with a combined service capacity of 622 beds at March 31, 2010. Average contract occupancy was 83.2% for the
three months ended March 31, 2010 compared to 91.9% for the three months
ended March 31, 2009. The decrease in the average contract occupancy is
primarily due to the under-utilization at our two facilities in California as a
result of the termination of our management contracts for these facilities in October 2009.
The average per diem rate was $55.64 and $53.75 for the three months ended March 31,
2010 and 2009, respectively. The average per diem rate in the three months
ended March 31, 2010 reflected the activation of our Hudson Correctional
Facility in November 2009.
Abraxas Youth and Family
Services
. Abraxas Youth and Family Services revenues
decreased approximately $2.2 million, or 8.6%, to $23.5 million for the three
months ended March 31, 2010, from $25.7 million for the three months ended
March 31, 2009, due primarily to (1) a decrease in revenues of $1.5
million due to the consolidation of the Texas Adolescent Treatment Center (TATC)
operations with our Hector Garza Residential Treatment Center (Hector Garza)
in late November 2009 and (2) a decrease in revenues of $0.8 million
at the Cornell Abraxas Academy due to a reduction in occupancy. The remaining net increase in revenues of
$0.1 million was due to various fluctuations in revenues at our other Abraxas
Youth and Family Services facilities and programs.
At March 31,
2010, we operated 15 residential Abraxas Youth and Family Services facilities
and nine non-residential community-based programs and facilities with an aggregate
service capacity of 2,804. Additionally, we had three vacant facilities with a
combined service capacity of 239 beds. Average contract occupancy for the three
months ended March 31, 2010 was 86.8% compared to 83.9% for the three
months ended March 31, 2009.
The average per
diem rate for our residential Abraxas Youth and Family Services facilities was
$194.65 for the three months ended March 31, 2010 compared to $197.51 for
the three months ended March 31, 2009.
Our average fee-for-service rate for our non-residential Abraxas Youth
and Family Services community-based facilities and programs was $48.47 for the
three months ended March 31, 2010 compared to $45.04 for the three months
ended March 31, 2009. Our average
fee-for-service rate can fluctuate from period-to-period depending on the mix
of services provided at our various non-residential Abraxas Youth and Family
Services facilities and programs.
35
Table of Contents
Adult Community-Based
. Adult
Community-Based Services revenues increased approximately $0.5 million, or
2.9%, to $17.7 million for the three months ended March 31, 2010, from
$17.2 million for the three months ended March 31, 2009, due an increase
in revenues of $0.5 million at the Reid Community Residential Facility
(principally due to its reactivation in the first quarter of 2009 after
suffering damage from Hurricane Ike in 2008).
Revenues decreased approximately $1.0 million due to our termination of
our management contract for the Dallas County Judicial Treatment Center (Dallas)
in late November 2009. The
remaining net increase in revenues of approximately $1.0 million was due to
various fluctuations in revenues at our other Adult Community-Based Services
facilities and programs.
At
March 31, 2010, we operated 27 residential Adult Community-Based Services
facilities and three non-residential community-based programs with an aggregate
service capacity of 3,558.
Average contract occupancy for the three
months ended March 31, 2010 was 116.2% compared to 104.3% for the three
months ended March 31, 2009.
The
average per diem rate for our residential Adult Community-Based Services
facilities was $70.29 for the three months ended March 31, 2010 compared
to $67.25 for the three months ended March 31, 2009. The average
fee-for-service rate for our non-residential Adult Community-Based Services
programs was $9.42 for the three months ended March 31, 2010 compared to
$9.07 for the three months ended March 31, 2009. Our average fee-for-service rates fluctuate
as a result of changes in the mix of services provided by our various Adult
Community-Based Services programs and facilities.
Operating Expenses excluding
depreciation and amortization
.
Operating
expenses, excluding depreciation and amortization increased approximately $3.8
million, or 5.2%, to $76.7 million for the three months ended March 31,
2010 from $72.9 million for the three months ended March 31, 2009.
Adult Secure Services
. Adult Secure
Services operating expenses increased approximately $5.3 million, or 14.4%, to
$42.0 million for the three months ended March 31, 2010 from $36.7 million
for the three months ended March 31, 2009.
The increase was due
primarily to operating expenses of $5.8 million at the Hudson Correctional
Facility which began operations in November 2009. This increase in operating expenses was
offset, in part, by a combined decrease in operating expense of $0.8 million
due to the termination of our contracts for Baker and Mesa Verde in December 2009. The remaining net increase in operating
expenses of $0.3 million was due to various fluctuations in operating expenses
at our other Adult Secure Services facilities.
As
a percentage of segment revenues, Adult Secure Services operating expenses were
71.5% for the three months ended March 31, 2010 compared to 64.5% for the
three months ended March 31, 2009.
The decrease in our operating margin in the three months ended March 31,
2010 was due primarily to (1) the activation of our Hudson Correctional Facility
in November 2009 (which is currently operating with available capacity),
and (2) those expenses related to our closed Baker and Mesa Verde
facilities.
Abraxas Youth and Family
Services
.
Abraxas Youth and Family Services operating expenses decreased
approximately $1.2 million, or 5.0%, to $23.0 million for the three months
ended March 31, 2010 from $24.2 million for the three months ended March 31,
2009, due primarily to the consolidation of TATC operations with our Hector
Garza facility in late November 2009 which decreased operating expenses
approximately $1.4 million. The remaining net increase in operating expenses of
$0.2 million was due to various fluctuations in operating expenses at our other
Abraxas Youth and Family Services facilities and programs.
As
a percentage of segment revenues, Abraxas Youth and Family Services division
operating expenses were 97.8% for the three months ended March 31, 2010
compared to 94.4% for the three months ended March 31, 2009. The decrease
in our operating margin in the three months ended March 31, 2010 was due
primarily to the decrease in revenues as noted above (reflective of occupancy
and customer mix at certain facilities).
Adult Community-Based Services
. Adult Community-Based Services
operating expenses decreased approximately $0.3 million, or 2.5%, to $11.7
million for the three months ended March 31, 2010 from $12.0 million for
the three months ended March 31, 2009, due primarily to the termination of
our management contract for Dallas in late November 2009 which decreased
operating expenses approximately $0.6 million.
The remaining net increase in operating expenses of approximately $0.3
million was due to various fluctuations in operating expenses at our other Adult
Community-Based facilities and programs.
As a percentage of
segment revenues, Adult Community-Based Services operating expenses were 66.0%
for the three months ended March 31, 2010 compared to 69.8% for the three
months ended March 31, 2009. The decrease in our operating margin in the
three months ended March 31, 2010 was primarily due to the reduction of
revenue previously noted which were not offset by operating expense reductions
due to contractual staffing requirements.
Pre-opening and start-up expenses.
There were no pre-opening
and start-up expenses for the three months ended March 31, 2010 and 2009
.
Depreciation and Amortization
.
Depreciation and amortization was approximately $4.7
million and $4.9 million for the three months ended March 31, 2010 and
2009, respectively. Amortization of
intangibles was approximately $0.1 million and $0.4 million for the three
months ended March 31, 2010 and 2009, respectively. The decrease in amortization expense in the
three months ended
36
Table of Contents
March 31, 2010 was due to the full
amortization of our non-compete agreements as of December 2009.
General and Administrative Expenses.
General and administrative expenses decreased
approximately $0.3 million, or 4.9%, to approximately $5.8 million for the
three months ended March 31, 2010, from $6.1 million for the three months
ended March 31, 2009 due primarily to lower legal and other professional
expenses in the three months ended March 31, 2010 as compared to the three
months ended March 31, 2009.
Interest.
Interest expense, net of interest income,
increased approximately $0.2 million, or 3.3%, to $6.2 million for the three
months ended March 31, 2010 from $6.0 million for the three months ended March 31,
2009. We did not capitalize any interest in the three months ended March 31,
2010, whereas we capitalized interest of approximately $0.7 million in the
three months ended March 31, 2009 related to the 700 bed facility
expansion project at the D. Ray James Prison. This increase was largely offset
by (1) a decrease in interest expense of approximately $0.3 million as a
result of a lower outstanding principal balance on MCFs debt and (2) a
decrease in interest expense on our Amended Credit Facility of approximately
$0.3 million due primarily to lower interest rates in the 2010 period.
Income Taxes.
For the three months ended March 31, 2010, we
recognized a provision for income taxes at an estimated effective rate of
42.4%. For the three months ended March 31,
2009, we recognized a provision for income taxes at an estimated effective rate
of 41.7%.
Contractual Uncertainties Related to
Certain Facilities
Regional Correctional Center.
The Office of Federal Detention Trustee (OFDT)
holds the contract for the use of the RCC on behalf of ICE, USMS and the BOP
with Bernalillo County, New Mexico (the County) through an intergovernmental
services agreement, and we have an operating and management agreement with the
County. In July 2007, we were
notified by ICE that it was removing all ICE detainees from the RCC and the
removal was completed in early August 2007. The facility is still
being utilized by the USMS and since May 2008 by the BOP, but not at its
full capacity. In February 2008,
ICE informed us that it would not resume use of the facility. In February 2008, OFDT attempted to
unilaterally amend its agreement with the County to reduce the number of
minimum annual guaranteed mandays under the agreement from 182,500 to
66,300. Neither we nor the County believe OFDT has the right to
unilaterally amend the contract in this manner, and OFDT has been informed of
our position. Although either party to the intergovernmental services agreement
has the right to terminate upon 180 days notice, neither party has exercised
such right as of March 31, 2010.
During the third quarter of 2009, we filed a claim against the United
States, acting through the United States Department of Justice, OFDT and ICE
(collectively, Defendants) for breach of contract and breach of the duty of
good faith and fair dealing, arising out of the Defendants improper
modification of the intergovernmental services agreement (the Contract) and
subsequent failure to pay for the shortfalls in the 2007-2008 and 2008-2009
minimum annual guaranteed mandays specified in the Contract.
There
is a pending lawsuit against the County concerning the County jail system, know
as the McClendon case. In 1994,
plaintiffs sued the County in federal district court in the District of New
Mexico over conditions at the county jail, which was then located at what is
now the RCC and run by the Company. The
County subsequently built their new Metropolitan Detention Center to house the
County inmates and also negotiated two stipulated agreements in 2004 designed
to end the McClendon lawsuit. These
stipulated settlements covered the Metropolitan Detention Facility and were
approved by the Court in 2005 (the 2005 settlement agreements).
In
March 2009, the Federal Judge presiding over the case issued an Order
based on motions filed by Plaintiffs class counsel asking the Judge to reform
the 2005 settlement agreements to allow for access to the RCC. In those motions, the Plaintiffs also
requested alternative relief in the form of withdrawal of the Courts approval
of the 2005 settlement agreements. Based
on our interpretation of the Order, the Judge denied Plaintiffs request for
access to the RCC, granted the alternative relief requested, withdrew her
approval of the 2005 settlement agreements and granted the option to Plaintiffs
to rescind their 2005 settlement agreements.
The Plaintiffs chose to rescind the 2005 settlement agreements. In the Order, the Judge concluded that the
RCC, at least to the extent it is used to house detainees by Bernalillo County
pursuant to the intergovernmental services agreement, is part of the county
jail system. The County has informed us
that it does not believe McClendon should apply to the RCC and the County has
filed an appeal of the Order to the U.S. Court of Appeals for the Tenth
Circuit. We are not party to this
lawsuit and the ramifications of the Courts Order to our operation of the RCC
are unclear.
The
2005 settlement agreements imposed various conditions on the Metropolitan Detention
Center that resulted in material increases to its operating costs. The effect of the rescission of the 2005
settlement agreements is unclear since those settlement agreements replaced
prior settlement agreements approved in 1996.
We do not believe we are contractually obligated to bear any incremental
costs of complying with any settlement agreements in the McClendon case
although the County has expressed to us that it
37
Table of Contents
may want us to absorb a portion of any costs
that would be incurred. We currently
plan to continue to operate the facility and also continue with our marketing
plans for the RCC.
Revenues
for this facility were approximately $3.6 million and $3.0 million for the
three months ended March 31, 2010 and 2009, respectively. The net carrying value of the leasehold
improvements for this facility was approximately $0.3 million and $0.6 million
at March 31, 2010 and December 31, 2009, respectively. Our lease for
this facility requires monthly rent payments of approximately $0.13 million for
the remaining term of the lease (which was extended through June 2010). To
date, although we have several federal agencies using the RCC, the facility
still has available capacity. Our
inability to expand the existing population with current or new customers or
any disruption of our operations due to activity in the McClendon case could
have an adverse effect on our financial condition, results of operations and
cash flows. We believe there has been no
impairment to the carrying value of the leasehold improvements at this
facility.
California Facilities.
In October 2009,
we were notified by the CDCR that they were terminating our contracts at our
two small California male community correctional facilities, (Baker Community
Correctional Facility (Baker) and Mesa Verde Community Correctional Facility
(Mesa Verde)) which represent a combined 622 beds of service capacity.
Revenues
for Baker were approximately $1.2 million for the three months ended March 31,
2009. There were no revenues in the
three months ended March 31, 2010. The net carrying value of this owned
facility was approximately $2.8 million at March 31, 2010 and December 31,
2009. We are considering potential
alternate customers for this facility (including the pending procurement for
female low-security beds by the CDCR (for which this facility would qualify)),
but we can make no assurances as to who the customer will be or what the
possible timing might be. We believe that there has been no impairment to the
carrying value of this facility.
Revenues
for Mesa Verde were $1.5 million for the three months ended March 31,
2009. There were no revenues for the
three months ended March 31, 2010. The net carrying value of the leasehold
improvements for this facility was approximately $0.6 million at March 31,
2010 and December 31, 2009. Our lease for this facility requires monthly
rent payments ranging from approximately $0.14 million to $0.16 million over
the remaining term of the lease through June 2015. We are considering
potential alternate customers for this facility (including the pending
procurement for female low-security beds by the CDCR (for which this facility
would qualify)), which we believe will ultimately result in the recovery of our
investment in this facility. However, we can make no assurances as to who the
customer will be (or what the possible timing might be). We believe that there
has been no impairment to the carrying value of the leasehold improvements at
this facility.
Realization of long-lived assets
We review our long-lived
assets (including our facilities at a facility-by-facility level) for
impairment at least annually or when changes in circumstances or a triggering
event indicates that the carrying amount of the asset may not be recoverable in
accordance GAAP. GAAP requires that
long-lived assets to be held and used recognize an impairment loss only if the
carrying amount of the long-lived asset is not recoverable from its estimated
future undiscounted cash flows and to measure an impairment loss as the
difference between the carrying value and the fair value of the asset. Assets
to be disposed of by sale are recorded at the lower of their carrying amount or
fair value less estimated selling costs. We estimate projections of
undiscounted cash flows, and also fair value, based upon the best information
available, which may include expected future discounted cash flows to be
produced by the asset and/or available market prices. Factors that
significantly influence estimated future cash flows include the periods and
levels of occupancy for the facility, expected per diem or reimbursement rates,
assumptions regarding the levels of staffing, services and future operating and
capital expenditures necessary to generate forecasted revenues, related costs
for these activities and future rate of increases or decreases associated with
these factors. Information typically utilized will also include relevant terms
of existing contracts (for similar services and customers), market knowledge of
customer demand (both present and anticipated) and related pricing, market
competitors, and our historical experience (as to areas including customer
requirements, contract terms, operating requirements/costs, occupancy trends,
etc.). We may also consider the results of any appraisals if a fair value is
necessary. Estimates for factors such as per diem or reimbursement rates may be
highly subjective, particularly in circumstances where there is no current
operating contract in place and changes in the assumptions and estimates could
result in the recognition of impairment charges.
We may be required to
record an impairment charge in the future if we are unable to successfully
negotiate a replacement contract on any of our facilities for which we
currently have an operating contract.
Contractual
Obligations and Commercial Commitments
We have assumed various financial obligations and
commitments in the ordinary course of conducting our business. We have contractual obligations requiring
future cash payments, such as management, consulting and non-competition
agreements.
We maintain operating leases in the ordinary course of
our business activities. These leases
include those for operating facilities,
38
Table of Contents
office space and office and operating
equipment, and the agreements expire between 2010 and 2075. As of March 31,
2010, our total commitment under these operating leases was approximately
$129.8 million.
The following table details the known future cash
payments (on an undiscounted basis) related to our various contractual
obligations as of March 31, 2010 (in thousands):
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
2011 -
|
|
2013 -
|
|
|
|
|
|
Total
|
|
2010
|
|
2012
|
|
2014
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
$
|
112,000
|
|
$
|
|
|
$
|
112,000
|
|
$
|
|
|
$
|
|
|
·
Special Purpose Entity
|
|
121,700
|
|
13,400
|
|
30,400
|
|
35,800
|
|
42,100
|
|
Long-term debt interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
27,090
|
|
9,030
|
|
18,060
|
|
|
|
|
|
·
Special Purpose Entity
|
|
39,424
|
|
5,154
|
|
17,110
|
|
11,740
|
|
5,420
|
|
Revolving line of credit-principal
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
67,400
|
|
|
|
67,400
|
|
|
|
|
|
Revolving line of credit-interest
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
2,467
|
|
1,026
|
|
1,441
|
|
|
|
|
|
Capital lease obligations
|
|
|
|
|
|
|
|
|
|
|
|
·
Cornell
Companies, Inc.
|
|
11
|
|
11
|
|
|
|
|
|
|
|
Construction commitments
|
|
7,817
|
|
7,817
|
|
|
|
|
|
|
|
Operating leases
|
|
129,840
|
|
13,096
|
|
29,521
|
|
27,541
|
|
59,682
|
|
Consultative and non-compete agreements
|
|
10
|
|
10
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
507,759
|
|
$
|
49,544
|
|
$
|
275,932
|
|
$
|
75,081
|
|
$
|
107,202
|
|
Approximately
$2.8 million of unrecognized tax benefits have been recorded as liabilities as
of March 31, 2010 but are not included in the contractual obligations
table above because we are uncertain as to if or when such amounts may be
settled. Related to the unrecognized tax
benefits not included in the table above, we have also recorded a liability for
potential penalties of approximately $0.1 million and for interest of
approximately $0.2 million as of March 31, 2010.
We
enter into letters of credit in the ordinary course of operating and financing
activities. As of March 31, 2010,
we had outstanding letters of credit of approximately $12.1 million primarily
for certain workers compensation insurance and other operating
obligations. The following table details
our letters of credit commitments as of March 31, 2010 (in thousands):
|
|
Total
|
|
Amount of Commitment Expiration Per Period
|
|
|
|
Amounts
|
|
Less than
|
|
|
|
|
|
More Than
|
|
|
|
Committed
|
|
1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
5 Years
|
|
Commercial Commitments:
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit
|
|
$
|
12,101
|
|
$
|
12,101
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In
the normal course of business, we are exposed to market risk, primarily from
changes in interest rates. We continually monitor exposure to market risk and
develop appropriate strategies to manage this risk. We are not exposed to any
other significant market risks, including commodity price risk or, foreign
currency exchange risk or interest rate risks from the use of derivative
financial instruments.
Credit Risk
Due
to the short duration of our investments, changes in market interest rates
would not have a significant impact on their fair value. In addition, our
accounts receivables are with federal, state, county and local government
agencies, which we believe reduces our credit risk. However, it is possible
that such situations as continuing budget resolutions, delayed passage of
budgets or budget pressures may increase the length of repayment of certain
receivables. During the third quarter of
2009 the State of California notified vendors providing services to the state
that it would temporarily issue IOUs.
We received IOUs from the State of California which were subsequently
repaid prior to September 30, 2009, and we do not presently hold any IOUs
from the State of California as of
39
Table of Contents
December 31, 2009. In addition, delays in the passage of budgets
(such as experienced in the State of Pennsylvania in 2009) may lead to
temporary delays in the repayment of our receivables from operations in such
states. As the State of Pennsylvania did not pass a fiscal 2010 budget until
mid-October 2009, the majority of the cities and counties in Pennsylvania
chose to defer their payments (during the state budget impasse through the
third quarter 2009) until the state budget had been adopted. Subsequent to the
passage of the states fiscal 2010 budget, our various Pennsylvania customers
returned to their historic payment patterns. While we closely monitor such
situations, we do not currently expect this to have a permanent impact on the
repayment of our receivables related to our facilities.
Interest Rate Exposure
Our
exposure to changes in interest rates primarily results from our Amended Credit
Facility, as these borrowings have floating interest rates. The debt on our consolidated financial
statements at March 31, 2010 with fixed interest rates consist of the
8.47% Bonds issued by MCF, in August 2001 in connection with the 2001 Sale
and Leaseback Transaction and $112.0 million of Senior Notes. The detrimental effect of a hypothetical 100
basis point increase in interest rates on our current borrowings under our
Amended Credit Facility would be to reduce income before provision for income
taxes by approximately $0.2 million for the three months ended March 31,
2010. At March 31, 2010, the fair
value of our consolidated debt was approximately $304.2 million based upon
quoted market prices or discounted future cash flows using the same or similar
securities.
Inflation
Other than personnel, offender medical costs
at certain facilities, and employee medical and workers compensation insurance
costs, we believe that inflation has not had a material effect on our results
of operations during the past two years.
We have experienced significant increases in resident/inmate medical
costs and employee medical and workers compensation insurance costs, and we
have also experienced higher personnel costs during the past two years. Most of
our facility management contracts provide for payments of either fixed per diem
fees or per diem fees that increase by only small amounts during the term of
the contracts. Inflation could substantially increase our personnel costs (the
largest component of our operating expenses), medical and insurance costs or
other operating expenses at rates faster than any increases in contract
revenues. Food costs (part of our
resident/inmate care costs) were also subject to rising prices in 2009 and
2010. We believe we have limited our
exposure through long-term contracts with fixed term pricing.
ITEM 4.
Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain disclosure controls and procedures designed to provide reasonable
assurance that information disclosed in our annual and periodic reports is
recorded, processed, summarized and reported, within the time periods specified
in the Securities and Exchange Commissions rules and forms. In addition,
we designed these disclosure controls and procedures to ensure that this
information is accumulated and communicated to management, including the chief
executive officer (CEO) and chief financial officer (CFO), to allow timely
decisions regarding required disclosures. SEC rules require that we
disclose the conclusions of our CEO and CFO about the effectiveness of our
disclosure controls and procedures.
We do not expect that our disclosure controls and procedures will
prevent all errors or fraud. A control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitation in a cost-effective control system, misstatements due to error or
fraud could occur and not be detected.
Under
the supervision and with the participation of our management, including our
principal executive officer and principal financial officer, and as required by
paragraph (b) of Rules 13a-15 and 15d-15 of the Exchange Act, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Exchange Act) as of the end of the period required by this report. Based on
that evaluation, our principal executive officer and principal financial
officer have concluded that these controls and procedures are effective at a
reasonable assurance level as of that date.
Changes
in Internal Control over Financial Reporting
In connection with the evaluation as required
by paragraph (d) of Rules 13a-15 and 15d-15 of the Exchange Act, we
have not identified any change in our internal control over financial reporting
(as such term is defined in Rules 13a-15(f) and 15d-15(f) under
Exchange Act) that occurred during our fiscal quarter ended March 31, 2010
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
40
Table of
Contents
PART II
OTHER
INFORMATION
ITEM 1.
Legal Proceedings.
See
Part I, Item 1. Note 9 to the Consolidated Financial Statements, which is
incorporated herein by reference.
ITEM 1A.
Risk Factors.
The
risk factors as previously discussed in our Form 10-K for the fiscal year
ended December 31, 2009 are incorporated herein by this reference.
Risks Related to the Merger
There
can be no assurance that the proposed merger of The GEO Group and Cornell will
be consummated. The announcement and
pendency of the Merger, or the failure of the Merger to be consummated, could
have an adverse effect on Cornells stock price, business, financial condition,
results of operations or prospects.
We have entered into an Agreement and Plan of Merger with The GEO Group, Inc.
(GEO) and GEO Acquisition III, Inc. (Merger Sub), dated April 18,
2010 (the Merger Agreement), pursuant to which GEO will acquire the Company
(the Merger). The Merger is subject to a number of conditions to closing,
including (i) the approval of the issuance of shares of GEO common stock
in accordance with the terms of the merger agreement, (ii) the adoption of
the Merger Agreement by the Cornell stockholders, (iii) the expiration or
termination of the waiting period (and any extension thereof) or the resolution
of any litigation instituted applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the HSR Act) or any other
applicable federal or state statute or regulation, (iv) no temporary
restraining order, preliminary or permanent injunction or other order shall
have been issued (and remain in effect) by a court or other governmental entity
having the effect of making the merger illegal or otherwise prohibiting the
consummation of the Merger, and (v) the approval for listing on the New
York Stock Exchange of the shares of GEO common stock issuable in connection
with the Merger, (vi) the receipt of certain third party contractual
approvals that are required as a result of the Merger.
If the stockholders of GEO fail to approve the GEO share issuance or if
Cornell stockholders fail to adopt the Merger Agreement, we will not be able to
complete the Merger. Additionally, if
the other closing conditions are not met or waived, we will not be able to
complete the Merger. As a result, there
can be no assurance that the Merger will be completed in a timely manner or at
all.
Further, the announcement and pendency of the Merger could disrupt our
businesses, in any of the following ways, among others:
·
Our
employees may experience uncertainty about their future roles with the combined
company, which might adversely affect our ability to retain and hire key
managers and other employees;
·
the
attention of our management may be directed toward the completion of the merger
and transaction-related considerations and may be diverted from the day-to-day
business operations of Cornell; and
·
customers,
suppliers or others may seek to modify or terminate their business
relationships with us.
41
Table of Contents
We may face additional challenges in competing for new business and
retaining or renewing business. These
disruptions could be exacerbated by a delay in the completion of the Merger or
termination of the Merger Agreement.
For the foregoing reasons, there can be no assurance that the
announcement and pendency of the Merger, or the failure of the Merger to be
consummated, will not have an adverse effect on our stock price, business,
financial condition, results of operations or prospects.
The
Merger Agreement limits our ability to pursue an alternative acquisition
proposal and requires us to pay a termination fee of $12 million, plus
expenses, if it does.
The Merger Agreement prohibits us from soliciting, initiating or
encouraging alternative merger or acquisition proposals with any third
party. The Merger Agreement also
provides for the payment by us to GEO of a termination fee of $12 million, plus
up to $2 million in fees and expenses, if the Merger Agreement is terminated in
certain circumstances in connection with a competing acquisition proposal for
us or the withdrawal by our board of directors of its recommendation that our
stockholders vote in favor of the proposals required to consummate the Merger,
as the case may be.
There
may be a long delay between GEO and Cornell each receiving the necessary
stockholder approvals for the Merger and the closing of the transaction, during
which time we will lose the ability to consider and pursue alternative
acquisition proposals, which might otherwise be superior to the Merger.
Following the GEO shareholder and Cornell stockholder approvals, the
Merger Agreement prohibits us from taking any actions to review, consider or
recommend any alternative acquisition proposals, including those that could be
superior to our stockholders when compared to the Merger. Given that there could be a delay between
stockholder approval and closing, the time during which we could be prevented
from reviewing, considering or recommending such proposals could be
significant.
A lawsuit has been filed against Cornell, members of Cornells
board of directors and GEO challenging the Merger, and an unfavorable judgment
or ruling in this lawsuit could prevent or delay the consummation of the
Merger, result in substantial costs or both.
Cornell, its directors and GEO have been named in a purported
stockholder class action complaint filed in Texas state court. The complaint
alleges, among other things, that Cornells directors breached their fiduciary
duties by entering into the Merger Agreement without first taking steps to
obtain adequate, fair and maximum consideration for Cornells stockholders by
shopping the company or initiating an auction process, by structuring the
transaction to take advantage of Cornells current low stock valuation, and by
structuring the transaction to benefit GEO while making an alternative
transaction either prohibitively expensive or otherwise impossible, and that
the corporate defendants have aided and abetted such breaches by Cornells
directors. The plaintiffs are seeking,
among other things, both an injunction prohibiting the Merger and a
constructive trust in an unspecified amount.
One of the conditions to the closing of the Merger is
that there not be any legal prohibition preventing the consummation of the
Merger, which would include the injunction sought by the plaintiffs in this
case if it were to be granted. As a
result, if any of the plaintiffs are successful in obtaining the injunction
they seek, the Merger may be blocked or delayed, or there could be substantial
costs to GEO and/or Cornell. It is
possible that other similar lawsuits may be filed in the future. Cornell cannot estimate any possible loss
from this or similar future litigation at this time. Cornell has obligations under certain
circumstances to hold harmless and indemnify each of the defendant directors
against judgments, fines, settlements and expenses related to claims against
such directors and otherwise to the fullest extent permitted under Delaware law
and Cornells certificate of incorporation, bylaws and contractual agreements
with its directors.
42
Table of Contents
ITEM 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer
Purchases of Equity Securities
The following table
presents information related to our repurchases of common stock for the periods
indicated.
|
|
|
|
|
|
Total Number
|
|
Approximate
|
|
|
|
|
|
|
|
of Shares
|
|
Dollar Value
|
|
|
|
|
|
|
|
Purchased
|
|
of Shares
|
|
|
|
|
|
|
|
as Part
|
|
that May Yet
|
|
|
|
Total Number
|
|
Average
|
|
of Publicly
|
|
Be Purchased
|
|
|
|
of Shares
|
|
Price Paid
|
|
Announced
|
|
Under the
|
|
Period
|
|
Purchased
|
|
per Share
|
|
Programs (1)
|
|
Programs (2)
|
|
(In
millions, except share and per
share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2010 to January 31, 2010
|
|
|
|
|
|
|
|
|
|
February 1, 2010 to February 28, 2010
|
|
|
|
|
|
|
|
|
|
March 1, 2010 to March 31, 2010
|
|
145,473
|
|
$
|
20.60
|
|
145,473
|
|
$
|
7.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,473
|
|
|
|
145,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Represents
the number of shares repurchased through our repurchase program authorized by
our Board of Directors in July 2009. During the three months ended
March 31, 2010, we repurchased approximately 145,473 shares at a cost of
$3 million under the program
|
(2)
|
We
do not intend to repurchase any more shares of our common stock under our
repurchase program pending the completion of the merger with GEO.
|
ITEM 3.
Defaults Upon Senior Securities.
None.
ITEM 4.
Removed and
Reserved.
None.
ITEM 5.
Other
Information.
None.
ITEM 6.
Exhibits.
2.1
Agreement and Plan of Merger
dated as of April 18, 2010, by and among Cornell Companies, Inc., The
GEO Group and GEO Acquisition III, Inc. (incorporated by reference from Exhibit 2.1
to the Companys Current Report on Form 8-K filed with the SEC on April 19,
2010).
3.1
Third Amended and Restated
Bylaws of Cornell Companies, Inc. (incorporated by reference from exhibit
3.2 to the Companys Current Report on Form 8-K filed with the SEC on February 24,
2010).
10.1
Amendment No. 2 to
Employment/Separation Agreement between Cornell Companies, Inc. and John
R. Nieser dated effective as of April 16, 2010 (incorporated by reference
from Exhibit 10.1 to the Companys Current Report on Form 8-K filed
with the SEC on April 22, 2010).
31.1*
Section 302
Certification of Chief Executive Officer
31.2*
Section 302
Certification of Chief Financial Officer
32.1**
Section 906
Certification of Chief Executive Officer
32.2**
Section 906
Certification of Chief Financial Officer
*
|
Filed herewith
|
**
|
Furnished
herewith
|
43
Table of Contents
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
|
|
CORNELL COMPANIES, INC.
|
|
|
|
|
|
|
Date: May 7, 2010
|
By:
|
/s/ James E. Hyman
|
|
|
JAMES E. HYMAN
|
|
|
Chief Executive Officer, President and Chairman
of the Board (Principal Executive Officer)
|
|
|
|
|
|
|
Date: May 7, 2010
|
By:
|
/s/ John R. Nieser
|
|
|
JOHN R. NIESER
|
|
|
Senior Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer and
Principal Accounting Officer)
|
44
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